Schnabel Warns Eurozone Inflation May Stay Above 2% for Extended Period

Isabel Schnabel, an Executive Board member of the European Central Bank (ECB), said that inflation in the eurozone is likely to remain above the ECB's 2% target for a prolonged period. This means that interest rates may stay elevated longer than investors expect.

Schnabel made these comments during a speech in London, where she emphasized that the ECB must not declare victory over inflation prematurely. The current inflation rate in the euro area is 2.6%, down from 10.6% in October 2022, but still above target.

The ECB cut its deposit rate by 25 basis points to 3.75% in June, but policymakers have been cautious about committing to further easing. Schnabel's warning implies that the ECB may slow or pause its rate-cutting cycle, keeping borrowing costs higher for longer to ensure inflation is fully contained.

The euro strengthened slightly against the dollar following her speech, reflecting investor expectations of a more gradual easing cycle. This means that households and companies in the eurozone can expect higher borrowing costs for an extended period, which could dampen economic growth.