European Central Bank Executive Board member Isabel Schnabel warned that the euro zone economy has not returned to pre-war conditions despite recent declines in oil prices. Speaking at a panel in Rome on Monday, Schnabel described the environment as still shaped by the war-related inflation shock that continues to generate indirect effects. According to Investing.com, her remarks suggest policymakers cannot simply look through the current inflation shock, arguing it is already creating second-round inflation pressures that could compound existing price pressures. Schnabel emphasised that the peace deal underpinning the drop in energy prices remains fragile, and that markets still point to higher oil prices over longer time horizons. She noted that gas prices are still running about 40% above pre-war levels, reinforcing her cautious stance. The decline in crude oil prices alone was not enough to restore the economic environment that existed before the conflict, as underlying inflationary pressures remain elevated.
Latest economic data reinforces Schnabel's cautious stance, with June Eurozone core CPI remaining stubbornly high at 4.2%, even as headline inflation has eased. As reported by Reuters, the Q2 wage growth just came in at 4.5%, fueling the very second-round effects the ECB is worried about. Schnabel pointed to several factors keeping price pressures elevated, including lingering risks in energy markets, persistent supply chain pressures, and stubborn core inflation. She observed that crack spreads, which measure refiner profitability, are running at twice their pre-war levels, reflecting continued stress in energy supply chains. She also flagged a run of fresh risks facing the bloc, including a European heat wave, a possible Super El Niño weather pattern that could push up food prices, and Rhine water levels approaching critical thresholds that could disrupt shipping and industrial supply chains. The ECB has been weighing signs of moderating headline inflation against persistent underlying price pressures, making future policy decisions highly dependent on incoming economic data.
The ECB's stance suggests it will remain more hawkish for longer than many currently expect, with short-term interest rate futures positioned for sell-off reflecting a repricing of expectations away from any rate cuts in 2026. According to market analysis, the mismatch between market hopes and central bank warnings will likely lead to increased market choppiness. The central bank is scheduled to receive updated economic projections in September, which will likely influence policymakers' approach to interest rate decisions. Higher borrowing costs for an extended period will also pressure European companies with weaker balance sheets, though credit spreads on some high-yield corporate bonds have not widened enough to reflect this growing risk. A second ECB rate hike at the July 22-23 meeting looks increasingly unlikely, though Schnabel's comments keep the door open to further tightening. However, another ECB official struck a more optimistic tone on energy prices, with Belgian central bank governor Pierre Wunsch maintaining that the ECB should avoid waiting too long if it intends to deliver one final rate increase.
The contrasting emphasis from Schnabel and Belgian central bank governor Pierre Wunsch underscores a live debate within the Governing Council over how quickly to declare the energy shock over. As reported by Reuters, Wunsch struck a notably calmer tone, saying the war-related shock to energy prices appears to have "disappeared" from market pricing, with oil and gas potentially returning to, or even falling below, their pre-war levels before long. He argued the ECB should not wait too long if it intends to deliver one final rate increase, warning of the risk of hiking just as the trend reverses. This widening gap within the Governing Council over how much weight to give the easing energy backdrop has shaped up as a key test for the ECB's next policy meeting, with traders already paring back tightening bets. Wunsch reiterated views he had expressed last month, arguing that delaying action until later could result in tightening policy after inflation dynamics have already shifted, and indicated that policymakers should remain alert to changing inflation trends and avoid acting too late if further tightening proves necessary.
