Schnabel Says ECB Rates Must Rise Further as Inflation Risks Persist
ECB board member Isabel Schnabel says today’s policy rate is unlikely to return inflation to target, sharpening the case for another increase.
The European Central Bank’s inflation debate moved from market inference to an explicit policy warning. Executive Board member Isabel Schnabel said the current policy rate is unlikely to return inflation to the ECB’s 2% target over the medium term and that further tightening will therefore be necessary.
Her comments, published in a Bloomberg interview and reported by Reuters at 05:44 UTC on 26 August, are the clearest public case yet from a senior ECB official for raising borrowing costs again. They arrive after the central bank increased rates in June for the first time in almost three years, responding to an energy shock from the continuing Middle East conflict.
Schnabel’s argument is not simply that headline inflation has risen. She is concerned that expensive energy and a stronger-than-expected euro-area economy could keep price growth above target for an extended period. Waiting until the shock is visibly embedded in wages, she warned, would put policymakers behind the curve.
That distinction matters. Central banks usually look through a temporary rise in oil or gas prices because higher energy bills can eventually reduce household demand. The case for tightening becomes stronger when the shock changes wage bargaining, services prices and inflation expectations. Schnabel is arguing that the balance of risks now warrants action before those second-round effects become obvious.
Reuters reported separately that policymakers were leaning toward a September increase but had little appetite to promise a longer sequence. Schnabel’s language goes further than that cautious consensus. She did not specify the number or size of future moves, but her conclusion that the present rate is insufficient implies that a single increase may not close the debate.
Markets had already begun pricing a longer tightening cycle as Europe’s energy risks deepened. The new intervention strengthens that positioning, but it should not be mistaken for a formal decision. The Governing Council acts collectively and will still weigh incoming inflation, wage, lending and activity data. Other members may place more weight on the possibility that high energy costs eventually weaken consumption and investment.
The euro area is especially exposed to the policy trade-off. Energy-importing companies face higher input costs, households lose purchasing power and heavily indebted governments pay more to refinance. At the same time, allowing inflation to persist would erode real incomes further and could force more disruptive increases later.
For banks, higher rates can lift margins on some loans but also slow credit demand and increase borrower stress. Property companies and leveraged businesses are more directly vulnerable because refinancing costs rise quickly. Savers may receive better deposit returns, while bondholders face price losses when yields move higher. Southern European sovereigns remain sensitive because even modest changes in expected ECB rates can widen the cost of servicing large debt stocks.
The central bank must also separate its inflation mandate from market concerns about public finances. Recent volatility in French and other long-dated bonds has highlighted fiscal fragility. That does not give the ECB licence to hold rates below the level needed for price stability, although disorderly market moves could complicate transmission across member states.
Communication will be almost as important as the decision. A rise presented as insurance against a temporary shock would have a different market effect from guidance that policy must remain restrictive through winter. The ECB can preserve flexibility by emphasising data dependence, but ambiguity has a cost when companies and households are making financing decisions. Clear conditions for pausing—such as slowing services inflation, contained wage growth and stable expectations—would help markets distinguish a finite adjustment from an open-ended cycle.
There is also a timing asymmetry. Monetary policy affects demand with a lag, while an energy shock reaches consumer prices quickly. Raising rates now cannot produce more oil or gas, but it can limit the propagation of the shock into domestic prices. The risk is that this restraint arrives after energy-driven weakness is already spreading through the economy.
Why it matters
Schnabel has changed the quality of the signal. Investors were previously extrapolating from energy prices and unnamed-policy-source reporting; they now have a direct statement from an Executive Board member that the current stance is inadequate. That makes a September increase easier to justify and raises the risk that easing expectations must be pushed further into the future.
The consequences extend beyond the next meeting. If the ECB tightens while the Federal Reserve remains cautious, rate differentials could support the euro, partly offsetting imported inflation. A stronger currency, however, can also weigh on exporters. Governments will face more pressure to present credible budgets, and firms must decide whether to refinance now or gamble on a later decline in yields.
Important uncertainties remain. The path of the Middle East conflict and energy supply could reverse quickly. Inflation may fall if demand weakens, and one official’s assessment does not bind the Council. The most defensible conclusion is narrower: the hurdle for another rate rise is now lower, and the ECB’s debate has shifted from whether the June move was isolated to how much additional restraint is required.