ECB Should Hike Rates in June, Schnabel Warns on Inflation Risks

Isabel Schnabel, a member of the European Central Bank (ECB) Executive Board, told Reuters that the Middle East energy shock has proved more persistent than initially expected and that, even if a peace deal is struck, damage to energy infrastructure and supply chains means a June rate hike is warranted.

Schnabel argued that the size and persistence of the current shock make it inappropriate to “look through” its effects; she noted early signs of second‑round effects — such as broader price and wage pressures — appearing in consumer expectation surveys and PMI indicators. She also referenced the ECB’s baseline, which implies further tightening this year.

Markets have largely priced in two rate increases for the ECB’s deposit rate and show a significant probability of a third move over the next year, while economists tend to be somewhat more cautious. Schnabel said the recent rise in euro‑area bond yields is driven mainly by higher inflation compensation and rising inflation risk premia amid greater uncertainty.

The intervention places the ECB at a familiar trade‑off: contain rising inflation expectations and inflation itself without unduly harming growth in an already weak euro‑area economy. Recent forecasts from the European Commission pointing to a slower expansion reinforce the need for careful, data‑dependent policy calibration, Schnabel added, stressing the case for reassessing policy at each meeting rather than pre‑committing to a path.

Market participants and analysts interpret Schnabel’s remarks as a clear signal that the ECB is prepared to act in June if incoming data corroborate the persistence of the inflation shock. The near‑term outlook will hinge on energy price developments and a string of macro releases; investors will watch ECB communications and upcoming data for guidance on the timing and scale of any further tightening.