Even a successful US-Iran peace agreement may no longer be enough to stop the European Central Bank from tightening policy next month. ECB Executive Board member Isabel Schnabel warned today that the energy shock unleashed by the conflict has already gone too far, arguing that inflation pressures are now spreading through the wider Eurozone economy.
“Given the size and the persistence of the current shock, looking through is no longer an option in my view,” Schnabel told Reuters. She added bluntly: “From today’s perspective, I think a rate hike in June will be needed.” Most importantly for markets, Schnabel said the ECB may already have passed the point where falling oil prices alone can reverse the inflation problem. “Even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains,” she said.
Schnabel warned that “we are seeing increasing signs that the shock is spilling over to other parts of the consumption basket,” pointing to PMI surveys, consumer expectations data, and sentiment indicators as evidence that second-round effects may already be materializing.
At the same time, Schnabel acknowledged that the Eurozone economy itself is weakening. She warned that the hit to growth “will also be stronger,” while confidence indicators continue deteriorating.
That leaves the ECB facing an increasingly uncomfortable stagflationary setup: slowing growth alongside inflation that remains too high and potentially more persistent than policymakers initially expected.
