European Central Bank (ECB) Executive Board member Isabel Schnabel has warned that inflation risks remain skewed to the upside despite the recent easing in energy prices following the ceasefire between the United States and Iran, reinforcing expectations that the central bank may need to raise interest rates further.
‎Speaking at the Petersberger Summer Dialogue in Germany, Schnabel said uncertainty over the economic outlook remains elevated, even though the agreement between Washington and Tehran has reduced the risk of severe disruptions to global energy supplies.
‎‎She noted that while oil prices have retreated in recent days, they are expected to remain relatively high as shipping through the Strait of Hormuz gradually returns to normal.
‎The persistence of elevated energy costs, she said, could continue to feed through into broader inflation, particularly by raising the prices of goods, food and services.
‎‎Schnabel’s remarks highlight the ECB’s concern that the inflationary effects of the Middle East conflict may prove more persistent than initially anticipated. Higher energy prices typically increase production and transport costs, which can ripple through supply chains before ultimately being passed on to consumers.
‎‎Reaffirming the ECB’s commitment to restoring price stability, Schnabel said further monetary tightening is likely to be required to bring inflation back to the central bank’s 2% medium-term target.
‎She added that consumer inflation expectations have risen, although wage growth has yet to show significant signs of accelerating.
‎‎Her comments come ahead of next week’s euro area inflation data, with economists expecting headline inflation to ease to 3.0% in June from 3.2% in May. Core inflation, however, is forecast to remain unchanged at 2.6%, suggesting that underlying price pressures continue to prove resilient.
‎‎Beyond inflation, Schnabel warned that higher energy costs are weighing on household confidence and consumer spending while increasing costs for manufacturers.
‎Despite these headwinds, she said euro area economic growth continues to benefit from government investment, robust spending on artificial intelligence and a labour market that remains resilient, even as demand for workers cools.
‎Schnabel also cautioned that elevated asset valuations and rising leverage across financial markets are increasing risks to financial stability, presenting an additional challenge for policymakers seeking to curb inflation without undermining economic growth.
