Key facts
- ECB board member Isabel Schnabel believes the euro zone economy has not recovered to its pre-war state.
- Schnabel cited persistent core inflation and elevated price pressures as reasons.
- She noted that oil and gas prices remain higher than pre-war levels.
- New shocks, including European heatwaves and Super El Niño, could increase food prices.
- Belgian central bank governor Pierre Wunsch suggested the ECB might hike rates too late if it delays.
European Central Bank board member Isabel Schnabel indicated on Monday that the euro zone's economy has not yet returned to its pre-war state, despite a recent decrease in oil prices. She highlighted that core inflation remains strong and price pressures are ongoing.
Schnabel's remarks suggest the need for continued monetary policy tightening, even as a second interest rate hike at the ECB's upcoming meeting on July 22-23 appears less likely. She stated that the peace deal is fragile, and markets anticipate higher oil prices over the long term. Additionally, gas prices are still approximately 40% higher than before the conflict.
Further contributing to the inflationary environment, Schnabel pointed to crack spreads, a measure of refiner profitability, being double their pre-war levels. Pipeline and supply chain pressures also remain elevated, alongside strong core inflation.
Looking ahead, Schnabel warned of new potential shocks, including a heatwave in Europe and the Super El Niño phenomenon, which could exert upward pressure on food prices. She also noted that rainwater levels are approaching critical points.
During the same panel discussion, Belgian central bank governor Pierre Wunsch expressed a more relaxed view, suggesting that the war-related shock to energy prices has largely disappeared from market pricing. However, he reiterated his call for the ECB not to delay rate hikes, expressing concern that the central bank might act too late.