ECB’s Schnabel warns Iran war shock still weighing on euro zone

The euro zone economy has not returned to its pre-war state despite a drop in oil prices, European Central Bank Executive Board member Isabel Schnabel warned on Monday, as core inflation remains elevated weeks after peace efforts in the Middle East began easing energy costs.reuters

Schnabel's remarks underscore a growing concern among ECB policymakers that the economic disruption triggered by the U.S.-Iran conflict, which erupted in February, continues to ripple through the currency bloc even as headline energy prices retreat. While ceasefire talks and diplomatic progress have helped bring oil and gas prices down from their wartime peaks, the decline has not fully restored the conditions that existed before hostilities began.cryptobriefing+1

Lingering Inflation Pressures

The comments align with a broader consensus forming within the ECB's Governing Council. At the central bank's annual Forum on Central Banking in Sintra, Portugal, last week, Bundesbank President Joachim Nagel similarly cautioned that inflation "will stay at an elevated level" because "the energy price shock is still in the system."cnbc

Euro zone inflation surged to 3% by June, according to ECB projections, driven initially by a near-doubling of oil prices during the conflict. Core inflation — which strips out volatile energy and food costs — has proven more stubborn, reflecting what the ECB has described as a "broadening effect" of higher energy costs into wages, services, and goods prices.euobserver+1

Rate Path Remains Uncertain

The ECB raised its deposit rate by 25 basis points to 2.25% in June, becoming the first major central bank to tighten policy in response to the war-driven inflation surge. Schnabel had previously stated that further rate increases would be necessary "to return inflation to our 2% objective in the medium term," while acknowledging that the pace would depend on how the conflict, the economy, and inflation evolve.reuters+2

However, internal divisions have emerged since the June decision. According to Bloomberg, there is now no consensus on the ECB's next move as inflation recedes alongside oil prices. Markets are pricing in a possible rate hike in September rather than at the July 22-23 meeting.bloomberg+1

Peace Talks and Economic Reality

Diplomatic efforts between the United States and Iran have accelerated in recent weeks, with negotiators holding what the U.S. side described as "positive discussions" in Doha. Iran has reported that frozen assets have been unlocked and oil sanctions lifted as part of the emerging framework.youtube

Yet as Schnabel's Monday remarks made clear, the path from ceasefire to economic normalization remains long. The war reshaped corporate pricing behavior early on — an ECB survey published in May found that firms' expected input costs peaked at 7.7% and selling price expectations hit 4.1% during the conflict — and those expectations have yet to fully unwind.ecb.europa