The European Central Bank will not let up on high inflation, board member Isabel Schnabel warned in Luxembourg. Prices in the eurozone are 3.2% higher than a year ago, and inflation could hit 3.6% in September.
The ECB's own experts forecast in September that inflation would still be 2.1% in 2028 — above the bank's 2% target. Oil and gas have got pricier since then and are now at the levels seen in the bank's worst-case scenario. That means inflation will miss the target by more, and for longer.
The war in Iran has driven up energy costs for households and businesses. There is also a risk that wages and prices start feeding off each other, locking in high inflation. "Central banks cannot wait until these effects actually materialize," Schnabel said. If policymakers wait for firms to raise prices and for wage talks to finish, she said, they will end up reacting too late.
The ECB raised its main interest rate to 2.50% at its September meeting, the second rise this year, and markets expect one more before the year is out. The bank is trying to stop costly energy from pushing up prices across the wider economy.
Schnabel said the ECB acted in time once the inflation outlook worsened after the conflict in the Middle East began, but the risks have not gone away.
It will become clear over the coming months how much of the pressure from earlier stages of production and supply chains is feeding through into core inflation and expectations, she said, and how the economy is coping with the rate hikes so far. "Central banks need to judge how these shocks are feeding through to core inflation and set monetary policy accordingly," she said.
Schnabel will step down from the ECB's executive board in early January, before her term ends, and move to the International Monetary Fund.