Key takeaway: ECB board member Isabel Schnabel said a rate increase in June would likely be needed because prolonged energy-price shocks are feeding through to the broader euro zone economy, and waiting is no longer an option even if geopolitical tensions ease.
Isabel Schnabel, a member of the European Central Bank's governing body, said in an interview that the extent and durability of the recent energy-price shock require a monetary policy response as soon as June. She argued the bank can no longer simply "look through" the disruption, noting that the shock is beginning to push inflation back into a wider range of goods and services.
Schnabel's comments came amid debate inside the ECB after sharply higher energy costs lifted inflation to 3%, a level well above the bank's 2% target and one that has prompted several policymakers to signal the need for action. The central bank has left interest rates unchanged for roughly a year, but officials discussed a potential move as recently as last month in light of the jump in energy prices.
She warned that even a quick resolution to the current geopolitical flare-up would not negate the need for a policy reaction. Schnabel said significant damage has already been inflicted on energy infrastructure and global supply chains, and that those effects are already working their way into the broader economy. From her perspective, those developments make a rate increase in June necessary.
Regarding the lifespan of the shock, Schnabel said the situation has exceeded the ECB's own adverse scenario, which assumed a rapid normalisation of oil prices. That assessment underpins her view that the bank may have passed a point where inaction is appropriate, regardless of how geopolitical events unfold.
She pointed to emerging signs of second-round effects, where higher energy costs begin to push up prices elsewhere in the consumption basket. Schnabel cited data points and indicators that are showing early warning signs of spillovers, including survey measures of consumer expectations, purchasing managers' indices and the European Commission's sentiment indicator. Taken together, she said, these measures suggest the shock is spreading beyond energy alone.
Schnabel also said that the ECB's baseline projection already assumes two rate hikes, indicating that a single move may not be sufficient. She urged policymakers to avoid making commitments about a predetermined path for policy beyond June, recommending instead that the bank reassess its stance at each meeting based on fresh incoming data.
Financial markets are reflecting heightened expectations for further tightening. Market pricing fully incorporates two hikes to the ECB's 2% deposit rate and assigns roughly a 50% probability to a third increase within the next year. By contrast, economists surveyed by Reuters were more cautious, expecting two hikes followed by a cut in mid-2027.
At the same time, the strength of the euro zone economy limits how aggressively the ECB can tighten. The European Commission recently projected 0.9% GDP growth for 2026, a sharp slowdown from the prior year. Schnabel suggested that even this outlook might be optimistic in light of the high persistence of the energy shock, which she said could have a stronger negative impact on growth than currently forecast.
That dynamic, she said, creates a mix of risks: a deeper-than-expected hit to economic growth and rising upside risks to inflation if confidence indicators decline sharply, particularly among consumers.
Schnabel, who is responsible for the ECB's market operations, said recent movements in government bond yields did not signal market disorder. She described the rise in euro-area yields as largely reflecting an increase in inflation compensation, which she interpreted as market pricing of greater uncertainty around the inflation outlook rather than evidence of a disorderly repricing of risk.
Looking ahead, Schnabel recommended a data-dependent approach. She emphasized that the bank should avoid binding itself to a sequence of moves and instead evaluate new information at each scheduled meeting, while acknowledging that the baseline outlook already assumes additional tightening.
Conclusion: Schnabel's remarks underscore growing concern within the ECB that the recent energy shock is more persistent than initially thought and that monetary policy will likely need to respond sooner rather than later. While markets have priced in further rate increases, the strength of the economic outlook and evolving data will determine how many hikes are ultimately required.