ECB’s Schnabel says rates must rise further amid resilient economy

The European Central Bank is poised to raise its deposit rate by 25 basis points to 2.5% at its September 10 meeting, as Executive Board member Isabel Schnabel declared that further monetary tightening is necessary to contain inflation driven by the ongoing Middle East conflict and a stronger-than-expected eurozone economy.

Schnabel Makes the Case for Higher Rates

"At the current policy rate, inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary," Schnabel told Bloomberg in an interview published Wednesday. The German official warned that consumer-price growth would likely exceed 2% for an "extended period" due to elevated energy costs, and that waiting for price increases to feed into wages would leave policymakers "behind the curve."bloomberg+3

Schnabel pointed to the eurozone's economic resilience as reinforcing the need for action. Output grew 0.4% in the second quarter — twice what economists had forecast — with fiscal policy, defense spending, and the global AI boom serving as key drivers. Data released Tuesday showed German growth was stronger than initially estimated.theedgemalaysia+1

On energy, Schnabel flagged natural gas developments as "particularly concerning." The front-month Dutch TTF contract closed above €68 per megawatt-hour on August 24, more than double its level before the Iran war began, with prices climbing roughly 120% since the start of the year as the Strait of Hormuz remains effectively closed.brusselssignal

Markets Price September as Near-Certain

Three sources told Reuters on August 25 that policymakers were leaning toward a 25-basis-point increase in September, which would bring the deposit rate to 2.5% from 2.25% after June's hike — the ECB's first in nearly three years. However, the same sources indicated there was little appetite to signal further tightening beyond that meeting.fxstreet+1

Money markets have priced the September move at roughly 93% probability, with about 38 basis points of total tightening expected by year-end — implying one firm hike and some chance of another. EUR/USD was trading near 1.1670 following the reports.finimize+1

What Comes Next

The September hike would bring the deposit rate to the upper bound of what ECB Chief Economist Philip Lane has described as the neutral range — the level at which borrowing costs neither stimulate nor restrain economic activity. Beyond that threshold, any further increases would actively dampen growth.theedgemalaysia+1

Schnabel declined to specify how far rates might ultimately rise, saying only that markets "seem to understand our reaction function very well" and that the path will depend on incoming data. The Governing Council will receive one more key input before it meets: Eurostat's flash estimate for August inflation, due September 1.brusselssignal+1