Isabel Schnabel, a member of the European Central Bank’s Executive Board, warned Thursday that inflation risks in the euro zone have escalated as the energy shock from the Iran war feeds into consumer prices, business pricing plans, and household expectations. Speaking at the 5th Annual Charles Goodhart Lecture in London, Schnabel indicated the ECB may need to raise interest rates as soon as its June 10 meeting, marking a notable shift from her earlier calls for patience.
A Hawkish Turn
Schnabel’s remarks represent a departure from her stance in March and April, when she repeatedly urged the ECB not to “rush into action” and warned against “premature tightening”. The change appears driven by mounting evidence of second-round effects — the very condition she had flagged as a trigger for policy action. “If there is a more enduring impact on inflation, monetary policy will need to respond, and it will do so decisively,” Schnabel said in March. The data since then suggests that threshold has been crossed.
Euro zone inflation hit 3% in April, up from 2.6% in March, driven by a 10.9% surge in energy prices. The ECB’s Consumer Expectations Survey showed one-year-ahead inflation expectations jumping to 4% in March from 2.5% in February — the sharpest monthly increase since the survey began. Three-year expectations rose to 3% from 2.5%. Schnabel noted the energy shock could transmit faster than in 2021-22 because “memories of that painful episode are still fresh”.
Market Pricing and the Path Ahead
Markets are now pricing a 92% probability of a rate hike at the June 10 meeting, which would lift the deposit rate from 2% to 2.25%. Bundesbank President Joachim Nagel said last week that a hike “may be necessary as soon as June,” according to Reuters. The IMF has recommended two hikes this year, while money markets are pricing roughly three increases over the next 12 months.
The backdrop is an oil market still disrupted by the conflict that began when the United States and Israel struck Iran on February 28. Despite a fragile ceasefire agreed April 8, Brent crude remains above $110 per barrel — up from roughly $73 before the war. EU fuel prices are still 12% above pre-conflict levels, and the closure of the Strait of Hormuz disrupted roughly 20% of global oil supplies.
The ECB’s Dilemma
The central bank faces a familiar tension: tightening policy to anchor inflation expectations while the euro zone economy weakens. Growth expectations among consumers fell to -2.1% in March, and Schnabel herself acknowledged just weeks ago that “reviving growth is the euro area’s key challenge”. The ECB held rates steady at its April 30 meeting, but the acceleration in price pressures since then appears to have tipped the balance toward action.
