ECB Must Keep Raising Interest Rates Amid Inflation Risks

Isabel Schnabel, a German member of the European Central Bank's (ECB) Executive Committee, believes that interest rates in the eurozone must continue to rise. She cited the ongoing conflict in the Middle East and the strong tone of the euro area economy as upside risks for inflation.

Schnabel warned that price increases will likely remain above 2% for an extended period due to rising energy costs. Delaying the response until this spike is reflected in wages would leave the ECB behind the curve, she noted.

The current official interest rate makes it unlikely that inflation will return to the medium-term target of 2%, so a greater adjustment will be necessary, Schnabel emphasized. She highlighted the strength of recent activity data, including Germany's upwardly revised GDP growth in the second quarter to 0.3% and the eurozone's 0.4% growth.

Schnabel pointed out that confidence indicators suggest growth is gaining momentum, with fiscal policy, increased defense spending, and the global rise of AI as determining factors. She also warned about persistent tensions in energy prices beyond crude oil and the 'especially concerning' trajectory of natural gas due to low storage levels in Europe.

The ECB's decision on interest rates will be crucial ahead of its September meeting, when new macroeconomic forecasts will be announced. The market almost entirely expects a new increase in rates, which would place the deposit rate at 2.5% if it materializes.