ECB Warns Inflation Not Yet Tamed, Markets Bet on September Rate Hike

European Central Bank (ECB) Executive Board member Isabel Schnabel warned that inflation remains a significant risk, driven by the ongoing Middle East conflict and stronger-than-expected Eurozone economic performance. She stated that current policy rates are insufficient to bring price growth back to the 2% target over the medium term, making further monetary tightening necessary.

Schnabel noted that elevated energy costs could keep Eurozone consumer price inflation above 2% for a prolonged period, and warned that waiting until price increases feed through to wage levels before acting would leave policy 'behind the curve'. She stressed that in an environment of robust aggregate demand, preventing second-round effects early is critical.

The ECB has already raised borrowing costs once this year, and markets have almost fully priced in a 25-basis-point hike at the September meeting, which would bring the deposit rate to 2.5%. Schnabel's remarks reinforced market expectations for another rate hike at the ECB's September meeting.