European Central Bank policymaker Isabel Schnabel has argued that the ECB must raise interest rates in June, even if a peace agreement between the United States and Iran were to be reached before then.
Schnabel outlined several key points underpinning her position:
Looking through the inflation spike is no longer a viable option
There are increasing signs that the inflation shock is spilling over into other parts of the consumption basket
Even if the Iran conflict ended today, policy action would still be necessary given the damage already done to energy infrastructure
The negative impact on economic growth from the shock will be stronger than previously anticipated
Incoming data points to upside risks to inflation and downside risks to growth
She does not see any concerning developments with regard to bond yields
There is considerable merit to Schnabel's stance given how events are unfolding in the Middle East. A peace deal would not mean the conflict is entirely over or that conditions return immediately to normal. Both sides would still need to facilitate nuclear discussions in the aftermath of any agreement.
Furthermore, even if traffic along the Strait of Hormuz were to resume at full capacity today, the damage inflicted on energy markets and global supply chains would not be undone overnight. Analysts estimate it could take a minimum of six months for conditions to normalize.
The broader concern among central banks is that what began as a "temporary" disruption could become more deeply embedded in price dynamics, eventually triggering second-round effects on inflation. While it remains early in that process, the ECB is seen as one institution that needs to position itself accordingly.
Even with two 25 basis point rate hikes this year, the ECB's deposit facility rate would only reach 2.50% — a level that sits just barely above the bank's neutral zone, making monetary policy only marginally restrictive. If price pressures become more entrenched across the broader economy, that level of tightening may prove insufficient to bring inflation durably back under control.
Why it matters
Even a peace agreement between the US and Iran would not immediately reverse damage to energy infrastructure or global supply chains — restoring normal conditions could take at least six months at minimum, meaning inflationary pressure may persist well beyond any diplomatic resolution.
The ECB's concern is that a disruption initially viewed as temporary could become embedded in broader price dynamics, triggering second-round inflation effects that are harder to reverse.
With two 25 basis point hikes this year, the deposit facility rate would reach only 2.50% — just barely above the ECB's neutral zone — leaving limited room to suppress inflation if price pressures become more entrenched across the economy.
