European Central Bank Executive Board member Isabel Schnabel stated that the ECB can no longer ignore the inflationary impact of geopolitical conflicts, as price pressures spread beyond the energy sector and the risk of inflation expectations becoming unanchored increases.
Schnabel noted at a Bank of Korea conference in Seoul on Monday that damage to energy infrastructure and global supply chains has altered price dynamics in a more persistent manner, meaning policymakers may need to respond even if the conflict ends immediately.
"We can no longer ignore this shock," said Schnabel, who is viewed as one of the ECB's most hawkish policymakers, adding, "The risk of inflation expectations becoming unanchored is rising."
These remarks reinforce Schnabel's stance from last week that the ECB needs to raise interest rates at its meeting on June 10-11. Market expectations for action at that meeting are widespread, as policymakers confront the challenge of rising energy costs spreading into broader inflation.
Data released last week showing inflation in France and Spain reached its highest levels so far in 2024 further strengthened market expectations that the ECB is about to restart its rate-hiking cycle.
France's CPI rose 2.8% year-on-year in May, slightly below the market forecast of 2.9% but still marking the highest level in nearly two years. Spain's CPI increased by 3.6% year-on-year, in line with expectations and also hitting a new high for 2024.
Surging energy prices, particularly for natural gas and fuel, remain the core driver of rising prices. However, given the uncertainty surrounding the economic impact of the conflict, officials are cautious about signaling the magnitude of rate hikes.
While most officials remain cautious about the rate path beyond June, and signs of economic slowdown have emerged, Lithuanian central bank governor Gediminas Šimkus said last week that a second rate hike is "quite likely," though the timing remains unclear.
Schnabel stated it is too early to determine how many rate hikes will be needed, and policymakers will continue to assess incoming data and developments in the Middle East.
"It is too early to say how many rate hikes will be enough to end this. We have to watch how things develop," she said.
She pointed out that the current shock differs from past energy crises as it increasingly resembles a global demand shock while simultaneously pushing up production costs worldwide.
Schnabel added that rising price pressures in the production sectors of some global regions are likely to be transmitted through global supply chains, ending a prolonged period of low finished goods prices and pushing up goods inflation.
"We are seeing supply chain pressures rising globally," she said. "This will basically bring inflationary pressure to the whole world."
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