FRANKFURT, July 6 - The euro area economy has not reverted to its pre-conflict state even though oil prices have eased, European Central Bank board member Isabel Schnabel said on Monday, underscoring why further policy tightening remains a possibility.
Speaking at an event in Rome, Schnabel argued that a drop in oil does not equal a return to conditions that existed before the Iran war. She said:
"Does the decline in oil prices mean that we are back to the pre-war situation? I don’t think so."
Schnabel pointed to several factors that keep price pressures elevated. She noted that market indicators still signal higher oil prices over longer horizons, and that gas prices remain roughly 40% above pre-war levels. She also highlighted that crack spreads - a gauge of refiners' profitability - were about twice what they were before the war, and that pipeline and supply chain pressures had not eased.
On top of energy-related strains, Schnabel warned of fresh shocks to the price outlook. She listed the heat wave in Europe and the Super El Niño as potential upward drivers for food costs, and raised concern over rainwater levels approaching critical thresholds. Those elements, she said, contribute to persistent core inflation and continued upside risks to prices.
The comments kept the possibility of additional ECB tightening on the table even as the likelihood of a second rate increase at the central bank's next policy meeting on July 22-23 appeared to be diminishing.
On the same panel, Belgian central bank governor Pierre Wunsch offered a contrasting read of market pricing. He said he was "relatively relaxed," adding that the war-related shock to energy prices appeared to have "disappeared" from market prices. Repeating comments made last month, Wunsch urged caution about timing, arguing the ECB should
"not wait too long"if it plans to deliver one more rate rise.
Wunsch also said:
"We will have a projection in September, but I’m a bit afraid that we would hike too late when the movement starts in the other direction."His remarks highlighted the tension within policy circles between the persistence of price pressures and market signals that suggest some normalization of energy-driven shocks.
Summary: Schnabel stressed that lower oil prices do not mean a return to pre-war conditions given ongoing core inflation and elevated energy and supply pressures. Wunsch was more sanguine on market pricing but warned against delaying a potential final rate rise.