ECB's Schnabel Calls for Further Rate Hikes to Curb Inflation Risks

On August 26, ECB Executive Board member Isabel Schnabel stated that due to the ongoing Middle East conflict and unexpectedly strong economic performance in the Eurozone, inflation faces upward risks, necessitating further interest rate increases. Consumer price growth may exceed 2% for "an extended period," and if policymakers wait until the impact is transmitted to wages, they will fall behind the curve. Schnabel pointed out that under current interest rates, inflation is unlikely to return to target levels in the medium term, requiring tighter policies. She emphasized the importance of preemptively preventing second-round effects in an environment where overall demand remains resilient, noting that delayed action could necessitate more aggressive tightening measures. Fiscal policy, increased defense spending, and the global AI boom are the main drivers of the strong economy. Schnabel warned that energy price pressures, excluding oil, have become more persistent, particularly with low European natural gas inventories and concerning trends in the gas market, posing substantial upward risks to inflation. The longer the conflict lasts, the higher the risks and intensity of indirect effects and second-round effects.

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