ECB's Schnabel sees rising inflation risk from Iran war

• Investors are pricing in three to four ECB rate hikes over the next 12 months, which would lift the deposit rate from 2% currently to 2.75%-3%
• Schnabel noted that fuel price increases may feed through the economy faster than during 2021-22 because 'memories of that painful inflation episode are still fresh'
• She urged governments to maintain fiscal discipline and preserve prudential rules, warning that fiscal dominance could erode central bank independence and lead to higher inflation and lower growth

ECB's Schnabel Signals Higher Inflation Risk from Iran War

Key Points:

European Central Bank board member Isabel Schnabel warned Thursday that inflation risks in the euro zone have increased due to the Iran war's impact on oil prices and supply chains. Her comments strongly hint at forthcoming interest rate hikes to combat these pressures.

Market Implications:

• Investors are now pricing in three to four ECB rate hikes over the next 12 months
• The deposit rate could rise from the current 2% to 2.75%-3%
• Schnabel indicated monetary policy will need to tighten if energy price shocks broaden across the economy

Inflation Concerns:

The German ECB board member highlighted troubling trends:

• Euro zone companies are planning price increases despite weak demand
• Household inflation expectations have risen
• Price shocks may transmit faster through the economy than during the 2021-22 inflation surge, as "memories of that painful inflation episode are still fresh"

Broader Context:

Schnabel emphasized the risk of "second-round effects" threatening medium-term price stability, noting this risk has intensified in recent weeks. The euro zone, which imports most of its fuel, is particularly vulnerable to oil price surges stemming from the Iran conflict.

Additionally, Schnabel urged governments to support inflation-fighting efforts by ensuring sustainable public debt levels and preserving post-financial crisis prudential rules. She warned that allowing "fiscal and financial dominance" to erode monetary policy space would lead to higher inflation and lower growth.

The statement marks a hawkish turn for ECB policymakers as geopolitical tensions create fresh inflationary pressures.