ECB's Schnabel: Inflation May Stay Above 2% for an Extended Period

Divisions within the European Central Bank over the interest rate path are intensifying. Executive Board member Isabel Schnabel has made clear that eurozone inflation is unlikely to return to the 2% target in the medium term, meaning monetary policy still needs further tightening. She noted that with inflation currently around 3.2%, the central bank has more work to do to bring it down to target, a stance that reinforces the hawkish position.

**Hawkish Officials Insist on Need for Tightening**

Schnabel's view is not an isolated hardline voice but reflects deep concerns among a segment of ECB policymakers over the persistence of inflation. She believes that even if economic activity faces headwinds, the risk of letting inflation stay above target for an extended period is greater, providing a clear rationale for continued rate hikes. In contrast, President Christine Lagarde and Chief Economist Philip Lane have taken a more cautious approach, mainly citing uncertainty in the economic outlook.

**Market Expectations and Institutional Assessments Diverge**

Schnabel's remarks have lent some support to market pricing of the central bank's peak rate. Although some private institutions have begun to lower rate hike expectations due to the recent drop in oil prices—for example, Oxford Economics argues that the sharp decline in energy prices has brought the initial inflation shock to an early end and views it as a signal of a pause after a one-off hike—markets still fully price in at least one 25-basis-point rate hike this year. This mismatch between official hawkishness and some institutions' dovish expectations means the policy meeting in a week's time will be a key window.

Notably, eurozone residents' inflation expectations themselves have also sent mixed signals. The latest ECB survey shows respondents' inflation expectations for the next 12 months fell from 4% in April to 3.5% in May, yet the three-year and five-year inflation expectations, which carry more weight for monetary policy decisions, remain elevated at 2.9% and 2.4% respectively, far above the 2% target. This supports Schnabel's judgment that inflation may be more persistent, providing data backing for maintaining tight policy.