The euro zone economy has not returned to its pre-war conditions despite the recent decline in oil prices, as underlying inflationary pressures remain elevated, according to European Central Bank (ECB) Executive Board member Isabel Schnabel. Reuters reported that her remarks suggest policymakers remain cautious about declaring victory over inflation, even as energy markets have stabilised.
Speaking at an event in Rome on Monday, Schnabel said the decline in crude oil prices alone was not enough to restore the economic environment that existed before the conflict. According to Reuters, she pointed to lingering risks in energy markets, persistent supply chain pressures and stubborn core inflation as key factors keeping price pressures elevated.
Energy markets still under pressure
Reuters reported that Schnabel noted the peace agreement following the Iran conflict remains fragile, with financial markets continuing to anticipate higher oil prices over the longer term. She also highlighted that natural gas prices remain around 40% above their pre-war levels, indicating that energy-related inflationary risks have not fully subsided.
She further observed that refining margins, measured through crack spreads, remain significantly higher than before the conflict, reflecting continued stress in energy supply chains.
Core inflation remains a concern
Beyond energy costs, Reuters reported that Schnabel emphasised the resilience of core inflation, which excludes volatile food and energy prices. She also pointed to ongoing pipeline price pressures and supply chain constraints that continue to feed into consumer prices across the euro zone.
In addition, Schnabel warned that new factors could add to inflationary risks in the coming months. According to Reuters, she cited the ongoing European heat wave, the effects of a Super El Niño weather pattern and declining rainwater levels, all of which could push food prices higher.
Rate hike expectations remain uncertain
Reuters reported that Schnabel's comments leave the door open to further monetary policy tightening, although financial markets have become increasingly sceptical that the ECB will deliver another interest rate increase at its July 22–23 policy meeting.
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.
Belgian central bank governor takes a different view
Also speaking at the Rome event, Belgian central bank governor Pierre Wunsch struck a somewhat more optimistic tone, Reuters reported. He said the energy price shock stemming from the Iran conflict appeared to have largely disappeared from market pricing.
However, Wunsch maintained that the ECB should avoid waiting too long if it intends to deliver one final rate increase. Reuters noted that he reiterated views he had expressed last month, arguing that delaying action until later could result in tightening policy after inflation dynamics have already shifted.
While the ECB is scheduled to receive updated economic projections in September, Wunsch indicated that policymakers should remain alert to changing inflation trends and avoid acting too late if further tightening proves necessary.
