ECB's Schnabel Warns Against Hasty Rate Hikes Amid Iran Conflict

The European Central Bank should not rush to raise interest rates in response to the Middle East conflict and its inflationary spillovers, according to executive board member Isabel Schnabel, who argued that policymakers have sufficient time to carefully analyze incoming economic data before making policy adjustments.

Speaking in Zurich, Schnabel said the ECB should not be in a rush to raise rates. Financial markets are currently pricing in rate increases from the ECB this year.

Schnabel said: "We have the time to look at the data and to analyse what is actually happening, whether there's evidence of second-round effects, how strong the demand environment is and how likely it is that this inflation shock is becoming entrenched in inflation expectations and also in wage growth."

DISTINGUISHING CURRENT SHOCK

Schnabel's case for restraint rests on a fundamental distinction between today's economic environment and the inflationary crisis of 2022. She highlighted that monetary policy is no longer accommodative, fiscal support has been withdrawn, there is no pent-up consumer demand, and supply-demand imbalances have shifted compared to the post-pandemic period.

The ECB's Governing Council has acknowledged that rising energy prices stemming from geopolitical tensions will likely drive near-term inflation higher while simultaneously dampening economic growth.

WATCHING FOR PERSISTENCE

The critical question policymakers must answer, according to Schnabel, is whether the energy shock proves temporary or becomes embedded in broader price-setting behavior. Without evidence of such persistence, the ECB can afford to wait.

She cautioned that the ECB must be careful not to "overreact".

Yet Schnabel was equally clear that the ECB will not hesitate to act decisively if conditions warrant. "If there is a more persistent impact on inflation, monetary policy will need to act and it will act and it will act decisively," she stated, reaffirming the central bank's commitment to its 2 percent inflation target.