ECB official: Eurozone economy more resilient than expected, interest rate hikes cannot wait.

European Central Bank Executive Board member Isabel Schnabel warned that with the ongoing conflict in the Middle East pushing up energy costs and the eurozone economy continuing to outperform expectations, the upside risks to inflation have not subsided, and interest rates must be raised further.

Schnabel told Bloomberg on Tuesday that inflation is unlikely to return to target in the medium term at current policy interest rate levels, and "further tightening will be necessary." She emphasized that in an environment where economic demand remains resilient, a second wave of tightening must be contained as soon as possible, and "delayed action will only force further tightening."

The market has largely priced in the ECB's expectation of a 25-basis-point rate hike next month, which would bring deposit rates to 2.5%. Investors also anticipate another rate hike as early as December 2026. Schnabel stated that the market "seems to understand our reaction function quite accurately," but did not provide specific guidance on the final magnitude of the rate hike.

Economic resilience exceeded expectations, but upside risks have emerged.

Supporting Schnabel's hawkish stance is a series of better-than-expected economic data. Data released on Tuesday showed that German economic output grew better than initially estimated in the second quarter, and the eurozone's overall quarterly growth reached 0.4%, the fastest in over a year, after essentially stagnating in the first quarter.

Schnabel attributed this momentum to three main drivers: strong fiscal policy, accelerated defense spending, and the global surge in artificial intelligence. "The economy continues to outperform expectations, with new data repeatedly exceeding upward expectations," she said. "Confidence indicators suggest growth is accelerating further, and compared to the ECB's June staff forecasts, I believe the risks to economic growth are slightly skewed to the upside."

Inflationary pressures are spreading, and the energy threat cannot be ignored.

On the inflation front, the eurozone's inflation rate accelerated to 2.9% in July, and Schnabel expressed concern about the persistence of energy price pressures. She pointed out that energy pressures beyond oil prices are becoming more persistent, with the gas situation being "particularly worrying"—currently, European gas reserves are low, posing a substantial upside risk to inflation.

"The longer the conflict lasts, the greater the risk and intensity of indirect and secondary effects, especially if aggregate demand remains resilient," she said. Schnabel also emphasized that waiting until energy costs are fully passed on to wages before taking action would put policy in a "behind-the-curve" situation. She expects consumer price growth to exceed the 2% target for "a considerable period of time."

Whether interest rates need to enter a restricted range remains the key issue.

Currently, both markets and policymakers are focused on a core question: whether interest rates need to rise to a "restrictive" level that inhibits economic activity. According to Bloomberg, ECB Chief Economist Philip Lane previously stated that 2.5% is currently at the upper end of a "neutral range" where interest rates do not have a significant stimulating or suppressing effect on the economy.

Schnabel did not give a clear signal on this, only stating that "the extent of further tightening will depend on future data performance." The ECB will hold its policy meeting next month, which officials have characterized as a key juncture for assessing whether further interest rate hikes are needed.

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