ECB’s Schnabel warns inflation risks remain high despite easing energy prices

European Central Bank Executive Board member Isabel Schnabel has warned that inflation risks are still tilted to the upside, even after the recent drop in energy prices following the U.S.-Iran ceasefire. This reinforces expectations that the central bank may need to raise interest rates further.

Speaking at the Petersberger Summer Dialogue in Germany, Schnabel said uncertainty around the economic outlook remains elevated. The agreement between Washington and Tehran has reduced the chance of severe disruptions to global energy supplies, but oil prices are still expected to stay high as shipping through the Strait of Hormuz normalises only gradually.

Higher energy costs could continue to feed into broader price pressures, especially through goods, food and services inflation, she said. The remarks highlight the ECB's concern that the inflationary impact of the Middle East conflict may last longer than first thought.

Policymakers have warned that higher energy prices can ripple through supply chains, raise manufacturers' costs and eventually push up prices for consumers. Schnabel reiterated that the ECB is expected to raise rates further to bring inflation back to its 2% medium-term target.

She also noted that consumer inflation expectations have increased, although wage growth has yet to show signs of accelerating significantly. The comments come ahead of next week's euro zone inflation report. Economists expect headline inflation to ease to 3.0% in June from 3.2% in May, while core inflation is forecast to stay unchanged at 2.6%.

Beyond inflation, Schnabel said higher energy costs are weighing on household confidence and consumption while increasing production costs, especially for manufacturers. She added that euro zone growth continues to get support from government investment and strong spending on artificial intelligence. The labour market remains resilient despite cooling demand for workers.

Schnabel also warned that elevated valuations across financial markets and higher leverage are increasing risks to financial stability. This adds another challenge for policymakers as they try to control inflation without derailing economic growth.