ECB's Schnabel Signals More Hikes Needed, Says Policy Not Yet Restrictive

ECB Executive Board member Isabel Schnabel has stated that current interest rates are not yet restrictive enough to bring inflation back to the 2% target, signaling that further rate hikes may be necessary.

This hawkish stance is driven by persistent core inflation remaining around 2.5%, strong wage growth of over 3%, and the lingering effects of the spring energy price shock.

The ECB is now focused on how sticky these underlying pressures remain, making it likely they will continue to raise rates unless inflation data cools down significantly.

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The European Central Bank (ECB) has sent a clear signal that its fight against inflation is far from over.

ECB Executive Board member Isabel Schnabel recently stated that monetary policy is 'not yet restrictive' enough, implying that more interest rate hikes could be on the horizon. This comment reinforces the ECB's hawkish stance following its rate hike in early June, shifting the market's focus to the persistence of underlying inflation pressures.

So, what's driving this firm position? The story unfolds through a few key factors. First is the recent energy shock. Between March and May, oil prices surged due to geopolitical conflicts, pushing overall inflation higher. The ECB warned it could no longer 'look through' this shock because its effects were starting to spill over into the prices of other goods and services.

Second, and more importantly, is the issue of sticky core inflation. Even as energy prices began to fall in June, core inflation—which excludes volatile food and energy prices—has remained stubbornly high, hovering around 2.5%. The ECB's own projections suggest it will stay near this level through 2027. This is the central challenge, as it reflects broad-based price pressures in the economy.

Third, strong wage growth is fueling this core inflation. With wages growing at over 3%, it's difficult for inflation to return to the 2% target, especially in the services sector. This creates a risk of a 'wage-price spiral,' where higher wages and higher prices feed off each other. A weaker Euro against the dollar also contributes by making imports more expensive.

This isn't a sudden shift. Schnabel had been warning about these risks since May. The ECB's rate hike on June 11 was a direct response to data showing these pressures were not easing as hoped. Therefore, Schnabel's latest comment is a logical continuation of this data-driven policy, setting a high bar for any pause in rate hikes until there is convincing evidence that core inflation is on a firm downward path.

Core Inflation: A measure of inflation that excludes volatile items like food and energy. It is often seen as a better indicator of underlying, long-term inflation trends.
Restrictive Policy: A monetary policy stance where interest rates are high enough to slow down economic growth, cool demand, and thereby reduce inflation.
Second-round effects: When a price shock in one area (like energy) leads to broader price increases as businesses pass on higher costs and workers demand higher wages.

ECB's Schnabel Signals More Hikes Needed, Says Policy Not Yet Restrictive

This hawkish stance is driven by persistent core inflation remaining around 2.5%, strong wage growth of over 3%, and the lingering effects of the spring energy price shock.

The ECB is now focused on how sticky these underlying pressures remain, making it likely they will continue to raise rates unless inflation data cools down significantly.

SAN.KSBBVA.KSING.KSDB.KS

The European Central Bank (ECB) has sent a clear signal that its fight against inflation is far from over.

Core Inflation: A measure of inflation that excludes volatile items like food and energy. It is often seen as a better indicator of underlying, long-term inflation trends.
Restrictive Policy: A monetary policy stance where interest rates are high enough to slow down economic growth, cool demand, and thereby reduce inflation.
Second-round effects: When a price shock in one area (like energy) leads to broader price increases as businesses pass on higher costs and workers demand higher wages.