Energy shocks can no longer be ignored! ECB Executive Board member adopts a hawkish stance: A rate hike in June is "imperative."

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Hawkish voices within the European Central Bank are once again intensifying. Executive Board member Isabel Schnabel made it clear that regardless of how the situation in the Middle East develops, the ECB should raise interest rates in June, stating that the current magnitude and persistence of the energy shock has exceeded the boundaries that policy can “turn a blind eye” to.

According to an interview published by Reuters on Tuesday, Schnabel said, “Given the scale and persistence of the current shock, in my view, ‘ignoring it’ is no longer an option. From today’s perspective, I believe a rate hike in June will be necessary.” She also pointed out that even if the conflict ended today, the damage to energy infrastructure and global supply chains is already done, and monetary policy still needs to respond.

Schnabel's remarks have set the tone for the ECB's June 11 policy meeting. The market generally expects a 25 basis point rate hike at that time, but some officials had previously expressed caution about tightening policy too much, fearing economic downturns caused by the war. Schnabel’s tough stance has further strengthened market expectations for this rate hike and increased uncertainty about the future path of interest rates in the euro area.

Energy shock intensity exceeds adverse scenarios

In the interview, Schnabel directly cited the ECB’s internal scenario framework, stating that the persistence of the current energy shock has already gone beyond the assumptions of the “adverse scenario.” She said, “In terms of persistence, we have actually gone beyond the scope of the adverse scenario—which had originally assumed that oil prices would normalize rapidly.”

The ECB had previously set baseline, adverse, and severe scenarios, and will release the latest staff forecasts updating these three scenarios at the June 11 meeting. Schnabel’s comments suggest that the new forecasts may show a more severe trajectory for inflation and growth than before, thus providing stronger data support for the rate hike decision.

Second-round effects emerging, inflation pressures spreading

Unlike some more dovish colleagues, Schnabel clearly noted the early signs of second-round effects. “We are seeing more and more indications that the shock is spreading to other parts of the consumption basket,” she said.

This assessment has important policy implications. If rising energy prices begin to pass through to core inflation, the ECB will face greater pressure to anchor inflation expectations with more aggressive monetary policy actions rather than waiting for energy prices to naturally decline.

Downside growth risks also rising

Schnabel also warned about the outlook for economic growth, believing that the high persistence of the energy shock will cause a deeper negative impact on the real economy. “We have already seen confidence indicators plummet, especially consumer confidence,” she said. “All of this means growth faces downside risks, while inflation faces upside risks.”

This ‘stagflation’-like combination—slowing growth alongside rising inflation—makes the ECB’s policy choices even more complicated. Schnabel’s position is that, at a time when inflation risks are more pressing, monetary policy must prioritize addressing price pressures. However, she also added that the ECB should not commit to a policy path beyond June, implying that future decisions will continue to depend on the data.

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