NextFin News - European Central Bank Executive Board member Isabel Schnabel warned that the escalating conflict in the Middle East risks "unanchoring" inflation expectations across the euro zone, potentially forcing the central bank to extend its tightening cycle. Speaking in London, Schnabel noted that the surge in energy prices and persistent supply chain disruptions stemming from the Iran war have created a volatile environment where households and businesses may no longer believe in a swift return to the 2% price stability target.
The warning comes as Brent crude oil prices hover near $93 per barrel, fueled by the continued closure of the Strait of Hormuz. Euro zone consumer price data for May showed inflation broadening beyond volatile energy and food components, with a growing share of companies reporting plans to raise prices despite cooling domestic demand. Schnabel emphasized that if these "second-round effects" take root, the ECB will have no choice but to act decisively to prevent a wage-price spiral.
Schnabel, a German economist who has consistently occupied the "hawkish" wing of the ECB’s Governing Council, is known for her rigorous focus on the structural risks to price stability. Since joining the board in 2020, she has frequently advocated for front-loading interest rate hikes and has been a vocal critic of the "transitory" inflation narrative that dominated early 2021. Her latest comments suggest she is prepared to back a rate increase as early as the June meeting, a move that would lift the deposit rate toward the 3% mark.
This stance currently represents a more aggressive position than the broader market consensus. While many analysts expect the ECB to maintain a restrictive posture, some institutional researchers argue that the weakening growth outlook in Germany and France may provide enough of a natural brake on inflation to allow for a pause. The view that the Iran war necessitates immediate further tightening is currently a minority position among sell-side firms, many of whom are prioritizing the risk of a technical recession over the risk of unanchored expectations.
The primary risk to Schnabel’s thesis lies in the potential for a diplomatic breakthrough. Recent reports of a U.S.-led ceasefire proposal have already caused brief pullbacks in energy futures; a permanent cessation of hostilities would likely deflate the energy-risk premium and ease the pressure on the ECB. However, Schnabel argued that central banks cannot afford to "wait and see" when credibility is at stake, noting that once inflation expectations become unmoored, the cost of bringing them back down rises exponentially. For now, the ECB remains in a defensive crouch, balancing the immediate shock of war against the long-term mandate of price stability.
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