Schnabel: the ECB must continue to raise benchmark interest rates

The context of rate hikes in the euro area

Schnabel's position fits into the broader debate within the ECB over the duration and intensity of monetary tightening. After repeated hikes in the key interest rate and the deposit rate, the institution led by Christine Lagarde is assessing whether further action is needed to bring inflation back to its statutory objective of 2% over the medium term.

Analysts note that the reference to the "conflict" and to "second round effects" echoes concerns already expressed in previous official ECB communications about the impact of the war in Ukraine on energy prices, supply chains, and inflation expectations in the euro area. The combination of these factors, according to the central bank, could hamper the ongoing disinflation.

Schnabel also stressed the need to maintain a restrictive stance until the data convincingly confirm a retreat in price pressures. The line expressed by the German member of the Executive Board is regarded as among the most hawkish within the Governing Council and is generally read by the market as a signal of determination in the fight against inflation.

The fallout on markets and expectations

On the market front, statements from a key ECB official influence expectations on futures rates and on the yields of euro-area government bonds. Schnabel's remarks, distributed through Bloomberg channels and picked up by Reuter, are set to fuel debate among operators over the timing and scale of the next possible hike.

According to economists' estimates, the euro-area economy has shown signs of demand resilience despite the hiking cycle. Schnabel used this element to justify the central bank's caution, stressing that resilient demand can translate into persistent wage and inflationary pressures if not adequately cooled by monetary policy.

The issue of resilient demand

The ECB, observers recall, has already carried out a significant monetary normalization path compared with the historically low levels reached during the pandemic. The deposit rate, in particular, has risen from negative values into clearly positive territory, helping to tighten financing conditions for households and businesses.

The German official's remarks come at a time when euro-area governments are grappling with the economic fallout of the conflict in Ukraine and the need to support European competitiveness, also in light of the rapid spread of new technologies such as artificial intelligence, which some analysts argue could have long-term effects on productivity and relative prices.

In conclusion, Schnabel reiterated that the ECB is ready to act with further hikes in benchmark interest rates if conditions require it, maintaining the flexibility needed to calibrate the monetary policy response to the evolution of macroeconomic data and inflation prospects in the euro area.