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Schnabel: Iran Peace Deal May Already Be Too Late for ECB Hike
ECB's Isabel Schnabel warns second-round effects already spreading via PMI surveys and consumer expectations, making June rate hike likely even if US-Iran peace deal succeeds. Growth weakening clouds euro rally.
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European Central Bank Executive Board member Isabel Schnabel directly rejected the market's simplest bullish scenario on Tuesday. Even if a US-Iran peace deal collapses oil prices, the inflation embedded in the Eurozone is already too deep. Schnabel told Reuters that a June rate hike is now needed: “From today’s perspective, I think a rate hike in June will be needed.” The energy shock has already spilled over into the wider economy, she argued.
Why a Peace Deal No Longer Delays the ECB
Schnabel cited three specific data streams as evidence that second-round effects are already materializing. PMI surveys show input price pressures spreading to services. Consumer inflation expectations are moving higher. Broader sentiment indicators point to entrenched price-growth views among households and firms. She said “looking through is no longer an option” because the size and persistence of the energy shock have passed the point where falling oil alone can reverse the problem. “Even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains,” Schnabel warned.
That destroys the naive trade that a successful peace deal would allow the ECB to delay tightening. The better market read is that the inflation process has become self-sustaining, and the ECB is now behind the curve. Schnabel’s language leaves little room for a dovish pivot at the June meeting.
Stagflationary Crosscurrents in the Eurozone
At the same time, Schnabel acknowledged that the Eurozone economy is weakening. The hit to growth “will also be stronger,” she said, with confidence indicators deteriorating. This creates an uncomfortable stagflationary setup: slowing growth alongside inflation that remains too high and more persistent than initially expected.