In an interview in Frankfurt on May 26, Isabel Schnabel said the ECB should proceed with an interest rate hike in June, following a year of unchanged rates. The central bank had debated tightening policy at its previous meeting as sharply higher energy prices pushed inflation well above its 2% target. Inflation reached 3% last month, with further increases considered likely.<\/p>\n
Schnabel stated that \u201clooking through\u201d the current energy price shock was \u201cno longer an option\u201d given its size and persistence. She noted that, in terms of persistence, conditions have moved beyond the ECB\u2019s earlier adverse scenario, which had assumed a rapid normalisation of oil prices. Survey evidence, including the ECB\u2019s Consumer Expectations Survey, PMI data and the European Commission\u2019s sentiment indicator, was cited as showing signs that higher energy costs are spilling over into other parts of the consumption basket.<\/p>\n
Although the United States has signalled progress in peace talks with Iran, Schnabel argued that the ECB may already be past a \u201cpoint of no return\u201d for monetary policy, as energy infrastructure and global supply chains have sustained damage. She said that even if the conflict ended immediately, a monetary policy response would still be required.<\/p>\n
Looking beyond June, Schnabel said the ECB should avoid pre\u2011committing to specific policy moves and should reassess its stance at each meeting based on incoming data. She highlighted that the ECB\u2019s baseline projection already includes two rate hikes, implying that a single increase may not be sufficient.<\/p>\n
Financial markets have fully priced in two rises in the ECB\u2019s 2% deposit rate and see roughly a 50% probability of a third move over the next year. By contrast, economists surveyed in a Reuters poll expect two hikes followed by a rate cut in mid\u20112027.<\/p>\n
The outlook for the euro area economy remains weak. The European Commission last week forecast 0.9% growth in 2026, a marked slowdown from last year and a projection that Schnabel suggested may still be too optimistic. She pointed to a sharp decline in confidence indicators, particularly among consumers, and said the high persistence of the energy shock implied stronger negative effects on growth alongside upside risks to inflation.<\/p>\n
As the ECB\u2019s market operations chief, Schnabel said recent volatility in government bond yields was not concerning, attributing the rise mainly to higher inflation compensation and an increase in inflation risk premia amid greater uncertainty about the future inflation outlook. She also noted that she would be ready to take over as ECB president if asked when Christine Lagarde\u2019s term ends and her own mandate, which runs until the end of 2027, is still in place.<\/p>\n
Why does Isabel Schnabel support a rate hike in June?<\/strong> How many rate hikes are currently expected?<\/strong> How is the euro area growth outlook affecting policy views?<\/strong> What is Schnabel\u2019s position on future ECB leadership?<\/strong>
She argues that the energy price shock has been larger and more persistent than expected, pushing inflation to 3% and creating signs of spillover into broader prices, making a monetary policy response necessary.<\/p>\n
The ECB\u2019s baseline projection includes two hikes, markets have fully priced in two and assign about a 50% chance to a third, while economists in a Reuters poll expect two hikes followed by a cut in mid\u20112027.<\/p>\n
Schnabel notes that high energy costs and declining confidence indicators pose downside risks to growth, with the European Commission forecasting 0.9% expansion in 2026, but she still sees upside risks to inflation that warrant policy tightening.<\/p>\n
She stated that she would be ready to take over as ECB president, if asked, when her current term as an Executive Board member runs until the end of 2027.<\/p>\n