ECB Cautious on Next Rate Move Amid Rising Energy Costs and Global Borrowing Costs

The European Central Bank (ECB) is closely monitoring inflation expectations and demand as key factors in determining its next rate move, according to ECB executive board member Isabel Schnabel.

Schnabel emphasized that policymakers should focus on whether persistent energy price increases will feed into inflation expectations, which currently remain around the ECB's 2% target. She noted that most measures of longer-term inflation expectations have remained stable due in part to previous rate hikes by the ECB.

In her recent speech in Luxembourg, Schnabel highlighted three key factors: whether demand across the economy remains stronger than expected, allowing companies to pass on higher costs to consumers; and the impact of rising global borrowing costs, driven in part by higher U.S. yields, which could either strengthen or weaken the case for further tightening.

The ECB's rate hike expectations have already been priced into markets, with some analysts predicting up to four additional rate hikes over the next year after two expected rises this year. Schnabel did not specify her preferred path but noted that robust credit dynamics suggest interest rates may still not be restrictive enough, and the level considered restrictive could now be higher than previously thought.