Schnabel signals June rate hike amid persistent inflation

ECB Executive Board Member Isabel Schnabel stated that a rate hike in June 2026 will likely be needed. She cited persistent inflation pressures driven by energy prices and increasing second-round effects.

Beyond the adverse scenario

Schnabel noted that inflation has already risen to 3 percent and is projected to climb towards 4 percent by year-end, exceeding market expectations.

The energy price shock, particularly from oil and gas, is larger and more persistent than initially assumed in the March baseline scenario.

She highlighted that the current oil futures curve now stands above the adverse scenario in terms of persistence.

The main concern is the spillover of this energy shock into broader inflation, with increasing signs of indirect and second-round effects.

Key indicators include firms' selling price expectations, which show a sharp increase across sectors, and short-term inflation expectations, which have risen sharply in all surveys and market indicators.

More worryingly, medium-term inflation expectations in the Consumer Expectations Survey have also increased, with a 'fattening of the right tail' indicating a rising risk of de-anchoring.

Wage developments, though lagging, are also being closely monitored via forward-looking indicators.

Looking through is no longer an option

Facing an adverse supply shock, Schnabel asserted that 'looking through' the current inflation spike is no longer an option for monetary policy.

She believes a monetary policy reaction would be necessary even if the war ended immediately, given the damage already inflicted on energy infrastructure and global supply chains.

From her perspective, a rate hike in June is needed.

However, she stressed that the ECB will remain strictly data-dependent, reassessing data at every meeting without pre-committing to a specific rate path.

Schnabel clarified that underlying inflation, not just headline inflation, is crucial for the outlook, noting significant upside risks to non-energy industrial goods inflation due to global pipeline pressures and rising producer prices.

She also addressed the argument that higher energy prices could be disinflationary over time, stating that the key question is whether weakening aggregate demand alone is sufficient to bring inflation back to target.

Credibility hinges on action

Schnabel's firm stance underscores the ECB's commitment to price stability, even at the cost of exacerbating negative economic impacts.

Her emphasis on data-dependency, while standard, signals a readiness to act decisively beyond an initial hike if conditions warrant.

This proactive approach is crucial for maintaining the ECB's credibility as an inflation fighter, especially as the risks to growth and inflation continue to increase with the prolonged conflict.