ECB’s Schnabel Signals Further Rate Hikes Needed to Tame Inflation

European Central Bank (ECB) Executive Board member Isabel Schnabel stated on Thursday that interest rates must continue to rise to bring inflation back to the institution’s 2% target, signaling that the central bank remains committed to tightening monetary policy despite growing economic headwinds in the eurozone.

Rate Hikes Necessary to Anchor Inflation Expectations

Speaking at an event in Frankfurt, Schnabel emphasized that the current level of borrowing costs is not yet sufficiently restrictive to guarantee a timely return to price stability. She noted that underlying inflation pressures, particularly in the services sector and from rising wages, remain elevated and require further policy action.

“We have made significant progress, but we are not done yet,” Schnabel said, according to prepared remarks. “To ensure that inflation converges to our 2% medium-term target in a sustained manner, we need to bring interest rates into sufficiently restrictive territory and maintain them there for as long as necessary.”

The comments come ahead of the ECB’s next monetary policy meeting in June, where markets widely expect another quarter-point rate hike. The central bank has already raised its key deposit rate from -0.5% in July 2022 to 3.75% as of May 2025, marking the fastest tightening cycle in its history.

Diverging Views Within the Governing Council

Schnabel’s hawkish stance contrasts with more cautious voices on the ECB’s Governing Council, who argue that past rate increases have yet to fully transmit through the economy and that further tightening risks an unnecessary recession. Data released last week showed eurozone GDP growth stalled in the first quarter of 2025, while the manufacturing sector continues to contract.

However, headline inflation in the euro area stood at 3.2% in April, well above the 2% target, while core inflation — which excludes volatile food and energy prices — remains sticky at 3.9%. Schnabel pointed to these figures as evidence that the battle against inflation is not yet won.

Market and Consumer Implications

For households and businesses across the 20-nation currency bloc, Schnabel’s remarks signal that borrowing costs for mortgages, corporate loans, and credit cards will continue to rise in the coming months. The ECB’s deposit rate is expected to peak near 4.25% by the third quarter of 2025, according to current market pricing.

Analysts at ING and Commerzbank noted that Schnabel’s speech reinforces the ECB’s data-dependent approach, but also underscores the central bank’s determination to avoid a premature pivot that could reignite inflation. The risk of overtightening, however, remains a concern as credit conditions tighten and economic momentum weakens.

Conclusion

The ECB faces a delicate balancing act: bringing inflation down to target without triggering a deep recession. Schnabel’s latest intervention suggests the Governing Council remains firmly focused on the inflation side of that equation, with further rate hikes likely in the near term. Markets and consumers should prepare for a higher-for-longer interest rate environment as the ECB navigates the final stretch of its tightening cycle.

FAQs

Q1: Why does the ECB need to raise rates further if inflation is already falling?
Inflation remains above the 2% target, and core inflation — especially in services and wages — is still elevated. The ECB wants to ensure inflation returns to target sustainably, not just temporarily.

Q2: How high will ECB interest rates go?
Markets currently expect the deposit rate to peak around 4.25% by mid-2025, but the exact level depends on incoming economic data and inflation trends.

Q3: What does this mean for borrowers in the eurozone?
Mortgage rates, business loans, and consumer credit costs will likely continue rising in the near term. Borrowers should expect higher monthly payments and tighter lending conditions.