Isabel Schnabel, the Director of the European Central Bank (ECB), suggested that further interest rate increases in the Eurozone are likely. Speaking to the weekly newspaper “Die Zeit,” Schnabel stated that, from the current perspective, the ECB will need to continue raising rates to bring inflation back to the target of two percent over the medium term. However, she emphasized that the scope and timing of these next policy steps will depend heavily on how the economic situation, inflation, and the conflict in the Middle East develop.
Schnabel further clarified that, in the ECB’s view, the recent truce in the Middle East does not constitute a fundamental signal for easing policy, even though energy prices have dropped following the provisional peace agreement. While the short-term outlook is better than anticipated, she maintained that the ceasefire does not provide a reason for monetary policymakers to relax their stance.
The ECB’s recent decision to hike interest rates was defended by Schnabel. She argued that the move was correct under all considered scenarios, even those involving a rapid normalization of oil prices. According to her, without this rate tightening, inflation would be expected to remain above the two percent target over the medium term. Although there is currently no evidence suggesting that wage growth is accelerating or that the public anticipates long-term higher inflation, she stressed, “the memory of the high-inflation period is still fresh, so one must assume that expectations today will react strongly to increases in inflation.”
