European Central Bank Executive Board member Isabel Schnabel said in a London speech Thursday that the central bank may need to raise interest rates if the conflict involving Iran produces a sustained effect on inflation.
Schnabel highlighted several channels through which the current crisis could amplify price pressures: a rising share of companies intending to raise prices, continued interruptions to supply chains, and adjustments in household expectations. She cautioned that the present episode would not take as long to be reflected in inflation dynamics as the previous inflation shock.
"If the energy-price shock broadens, monetary policy will need to tighten to contain the risk of second-round effects threatening medium-term price stability," Schnabel said. "This risk has increased in recent weeks."
The ECB has so far held policy steady even as inflation has moved well above its 2% objective. Officials have been waiting for additional data as the effects of higher energy costs continue to work through the economy, Schnabel said.
Officials within the governing council have signaled differing views on the timing of any move. President Christine Lagarde has indicated a policy move is possible in June. Slovakia's Peter Kazimir described action next month as "all but inevitable," while Bundesbank president Joachim Nagel said a rate increase will be necessary unless the outlook for inflation and growth improves significantly. By contrast, France's Francois Villeroy de Galhau, who will leave his post before the next policy meeting, said higher energy costs have not inflicted sufficient damage to warrant a response.
Markets are currently pricing in at least two quarter-point rate increases this year.
Schnabel stressed the indicators she and other policymakers will monitor. "If we see that the higher costs are being passed through, and that the wages do increase, that is then the sign that monetary policy has to react - not only to send a signal, but actually to constrain aggregate demand," she said.
Her remarks underscore the ECB's focus on the possible spillover from energy prices to broader inflation dynamics. Policymakers are balancing the need for further evidence against the risk of late action should wage and price behaviour confirm a wider upward trend in inflation.