European Central Bank board member Isabel Schnabel says the ECB should raise interest rates in June. The call for a rate increase marks a clear shift in policy direction as the central bank confronts inflation that has proven difficult to stamp out.
A signal on inflation
Speaking in her capacity as a member of the ECB's executive board, Schnabel argued that the proposed rate hike is necessary to combat entrenched inflation. Her statement comes as euro-area consumer prices remain above the ECB's 2% target. The bank has held rates steady for several months after a series of increases, but recent data suggest price pressures are not fading as quickly as hoped.
Schnabel's comments are among the most direct from a top ECB official in weeks. They suggest the governing council may be preparing to tighten policy again despite concerns about economic growth. Inflation in the euro zone has hovered around 2.4% in recent months, with core inflation — which strips out volatile food and energy prices — proving especially sticky.
What a June hike means for markets
A rate increase in June could reduce liquidity in financial markets and raise volatility in risk assets such as stocks and corporate bonds. Investors have grown accustomed to relatively stable borrowing costs since the ECB paused its tightening cycle late last year. A surprise hike would force traders to reassess the outlook for the euro area economy and the path of monetary policy.
Bond markets have already started to price in a higher probability of a move. The yield on Germany's 10-year Bund, a benchmark for the region, edged up following Schnabel's remarks. Analysts expect the euro to strengthen if the ECB follows through, which could weigh on exports.
The reasoning behind the call
Schnabel did not provide a detailed explanation of why she believes a June hike is the right move, but her emphasis on "entrenched" inflation points to underlying pressures that have not responded to earlier rate increases. Wage growth in the euro zone remains robust, and services inflation has been slow to cool. The ECB has previously warned that these factors could keep inflation above target for longer.
Other ECB officials have expressed caution about further tightening. Some worry that raising rates again could push the economy into a recession. But Schnabel's comments suggest the hawks on the governing council are gaining confidence that the benefits of acting now outweigh the risks.
The ECB's next monetary policy meeting is scheduled for June 6. Schnabel's call puts the spotlight on that decision. The council will have fresh inflation and GDP data to consider by then. Whether a majority backs her view remains an open question.
