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Two top European central bankers on Tuesday laid the groundwork for a likely interest rate rise in June as they warned that high oil prices are fuelling wider inflation.
European Central Bank executive board member Isabel Schnabel warned that rising inflation meant that “looking through” the energy shock caused by the conflict in the Middle East “is no longer an option in my view” even as talks continue to extend a fragile ceasefire between Iran and the US.
“From today’s perspective, I think a rate hike in June will be needed,” she told Reuters in an interview published on Tuesday.
ECB chief economist Philip Lane separately told Nikkei, owner of the FT, that the ECB’s “most benign scenario”, in which it could ignore a “temporary spike in energy prices”, becomes “less likely” the longer the conflict in the Gulf continues.
Investors are currently pricing in two quarter-point rate rises this year, which would lift borrowing costs in the Eurozone to 2.5 per cent, the highest level since March 2025.
Both policymakers warned that inflation pressures are currently higher than the ECB expected when it published its last forecasts in March. Back then, it predicted average annual inflation of 2.6 per cent for 2026 in its baseline scenario and 3.5 per cent in an adverse one. The central bank targets an inflation rate of 2 per cent over the medium term.
The macroeconomic outlook has got “worse” since March, said Lane, adding it was likely that the ECB will revise its inflation forecast upwards at its next meeting on June 11.
Schnabel predicted that inflation is “going to rise further” towards 4 per cent at the end of the year. Inflation in the Eurozone hit 3 per cent in April. Economists polled by Reuters expect inflation to remain at that level in May when a first estimate is published next Tuesday.
Both rate-setters stressed that the ECB had not pre-committed to any decision and avoided giving any guidance beyond June.
Schnabel tacitly pushed back against a view among some investors that three quarter-point increases might be necessary. “What I can say is that the baseline scenario that we had in March incorporated market expectations of two rate hikes,” she said.
Lane said that the market’s view on future interest rate rises “is very sensitive to the price of oil” and investors “see the same shock that we see.
“I don’t think the market needs some kind of extra guidance from us,” he stressed.
Both also warned of the dangers of “indirect effects” when higher energy prices start to spill over into the wider economy — a clear red line for policymakers to act.
“Our surveys suggest many firms expect that they will have to raise prices,” Lane said, adding that this could result in a “broader inflation problem” and “a major issue”. The ECB was seeing “increasing signs” that inflation beyond energy was on the rise, Schnabel said.
