ECB should raise rates in June, even if Iran peace deal is struck, Schnabel says

FRANKFURT – The European Central Bank (ECB) should raise interest rates in June even if ongoing peace talks involving Iran lead to a deal, as the conflict has lasted longer than expected and elevated energy prices are spilling over into the broader economy, ECB Executive Board member Isabel Schnabel said.

The European Central Bank has kept interest rates unchanged over the past year. However, policymakers debated a potential hike last month after surging energy costs pushed inflation well above the bank’s 2% target. Several officials have since signaled that further monetary tightening may be necessary.

“Given the size and the persistence of the current shock, looking through is no longer an option in my view,” Schnabel told Reuters in an interview. “From today’s perspective, I think a rate hike in June will be needed.”

While the United States has indicated progress in peace negotiations with Iran, Schnabel said the ECB may already be past a point where policy could remain unchanged, citing lasting damage to energy infrastructure and the transmission of higher energy costs into broader price pressures across the economy.

Even if the conflict were to end immediately, she said, the economic impact would likely persist.

“Even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains,” she said. “So even then, I believe that a monetary policy reaction would be needed.”

Schnabel added that the ECB’s earlier downside scenario assumptions—based on a rapid normalization of oil prices—no longer appear realistic.

Inflation rose to 3% last month, with further increases expected. Policymakers are increasingly concerned that sustained high energy costs could trigger second-round effects, lifting prices across a wider range of goods and services and embedding inflation more deeply in the economy.

Schnabel said there are already early signs of these spillovers, pointing to indicators such as the ECB’s Consumer Expectations Survey, purchasing managers’ index (PMI) data, and European Commission sentiment readings.

“We are seeing increasing signs that the shock is spilling over to other parts of the consumption basket,” she said.

Looking ahead, Schnabel said the ECB should avoid committing to a preset policy path and instead reassess conditions at every meeting based on incoming data. However, she noted that the central bank’s own projections still imply multiple rate increases, suggesting that a single hike may not be sufficient to stabilize inflation.

Financial markets have already priced in two additional rate hikes to the ECB’s 2% deposit rate, with roughly a 50% chance of a third move over the next year. Economists, however, remain more cautious, generally expecting two hikes followed by a potential rate cut in mid-2027, according to a Reuters poll.

Despite the tightening outlook, concerns remain about the euro zone’s weak growth momentum. The European Commission recently projected economic expansion of just 0.9% in 2026, a significant slowdown from previous years and potentially still optimistic.

“Given the high persistence of the shock, I believe that the negative impact on economic growth will also be stronger,” Schnabel said. “We have seen a sharp decline in confidence indicators, especially among consumers.”

“All of these imply downside risks to economic growth and upside risks to inflation,” she added.

Schnabel, who oversees the ECB’s market operations, said financial markets have so far absorbed recent developments without major disruption. She noted that volatility in euro zone government bond yields reflects shifts in inflation expectations rather than systemic stress.

“The increase in bond yields in the euro area is mainly driven by an increase in inflation compensation,” she said. “And this partly reflects an increase in inflation risk premia owing to heightened uncertainty about the future inflation outlook.”

Asked about her future at the central bank, Schnabel, whose term ends in 2027, said she would be willing to take on the ECB presidency if offered, succeeding ECB President Christine Lagarde.