FRANKFURT, June 25 (Reuters) – The European Central Bank will need to keep raising interest rates as energy prices remain high and a ceasefire in the Middle East is no reason for policymakers to let their guard down, ECB board member Isabel Schnabel said.
The ECB became the first major central bank to raise borrowing costs this month in the hope of containing a war-led rise in energy prices and traders see at least one more move by the end of the year, even after a U.S.-Iran deal brought down oil prices.
Schnabel insisted that more tightening would be needed but kept her options open as to when and how far rates would need to rise.
“From today’s perspective, we will need to raise interest rates further in order to bring inflation back to our 2% target over the medium term,” Schnabel told German newspaper Die Zeit in an interview. “However, the extent and timing of further measures will depend on how the conflict, the economy and inflation evolve.”
Analysts at Societe Generale said Schnabel was rowing back from a “faux pas” by ECB President Christine Lagarde, who said on Monday she didn’t see the need for a “more forceful policy response at this stage”.
Traders see a one-in-three chance of the ECB raising rates already at its July 22-23 meeting, with a move seen as more likely in September followed by a possible final hike some time next year.
“Our view remains that markets are overstating the likely extent of ECB tightening,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said. “Our forecast is for a final rate hike in September, with the recent decline in oil prices making a July increase unlikely.”
ECB Chief Economist Philip Lane said on Tuesday euro zone inflation could stay above the ECB’s 2% target for some time, even if peace in the Middle East holds, but this shock still only requires a measured policy response.
(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Andrew Cawthorne, Alexandra Hudson)
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