Schnabel signals further ECB rate rises as gas prices surge

European gas prices have more than doubled since the start of the year, and the ECB's most hawkish executive board member says that alone justifies further rate increases. Isabel Schnabel, the German member of the Executive Board, told Bloomberg in an interview published on 26 August that the deposit facility rate, now 2.25 per cent after a quarter-point move in June, is insufficient to bring inflation back to the 2 per cent target over the medium term. Her argument rests on two pillars: a prolonged Middle East conflict that has effectively closed the Strait of Hormuz, and a eurozone economy that expanded 0.4 per cent in the second quarter, double what economists had predicted.

Energy shock feeds into headline inflation

The numbers are stark. Eurostat's flash estimate for July showed headline inflation at 2.9 per cent, up from 2.8 per cent in June, with the energy component accelerating to 10 per cent year on year from 8.5 per cent. Core inflation, which strips out energy and food, held at 2.5 per cent, while services inflation, the stickiest segment, ran at 3.3 per cent. The front-month Dutch Title Transfer Facility contract, Europe's gas benchmark, settled above €68 per megawatt-hour on 24 August, its highest level since January 2023. That is roughly 120 per cent higher than where it traded before the Iran war began, and Norway's decision to extend outages at several North Sea fields has tightened supply further.

Schnabel's concern is not the first-round effect of dearer energy, that is largely exogenous, but the risk that households and firms start embedding those costs into wage demands and pricing decisions. "Waiting until those costs fed through into wages would leave policymakers behind the curve," she warned. The phrase "second-round effects" is central bank code for a wage-price spiral, and the ECB's governing council has been explicit since the 2021-22 episode that it will act pre-emptively rather than reactively.

A hawkish signal ahead of September

The interview was clearly timed to shape expectations before the governing council meets on 9-10 September. Three sources told Reuters on 25 August that policymakers were leaning towards another 25-basis-point increase, which would lift the deposit rate to 2.5 per cent. The same sources said there was little appetite to signal further tightening beyond that meeting, a nuance Schnabel did not contradict, she said only that the scale of any further moves would depend on incoming data, and that markets "seem to understand our reaction function very well." Money markets have priced roughly 40 basis points of cumulative increases by December, implying a September move plus one more before year-end.

Schnabel has long occupied the hawkish end of the council. Her public interventions tend to precede tightening cycles: she made similar arguments in early 2022 before the ECB began its most aggressive hiking cycle in two decades. That track record gives her words weight, but they do not bind the council. The deposit rate is set by the 26-member governing council, not by the six-person executive board alone. Other members, particularly from southern eurozone economies where mortgage markets are more variable-rate sensitive, may prefer to wait for the August flash estimate due on 1 September before committing.

Growth resilience complicates the calculus

The ECB's task would be simpler if the economy were weakening. Instead, second-quarter GDP grew 1 per cent on the year, suggesting the transmission of 425 basis points of cumulative tightening since mid-2022 has been slower than models predicted. Household savings buffers remain elevated in Germany and the Netherlands, fiscal policy in several member states is still expansionary, and the labour market is historically tight, unemployment across the euro area stood at 6.4 per cent in June. That resilience means demand-side pressure on prices persists even as supply-side energy shocks dominate the headlines.

There is also a fiscal dimension. Higher policy rates increase debt-service costs for governments with large refinancing needs. Italy's debt-to-GDP ratio exceeds 140 per cent; France's deficit is projected above 5 per cent of GDP this year. The ECB's transmission protection instrument (TPI) exists precisely to prevent fragmentation, a disorderly widening of sovereign spreads, but it has never been activated, and its conditionality requires compliance with EU fiscal rules that several large members are currently breaching. A September hike tests the credibility of that backstop.

Households and banks feel the pass-through

For households, the pass-through is already visible. Variable-rate mortgages in Spain, Portugal and Italy reset off the Euribor, which tracks the deposit facility rate with a short lag. New fixed-rate lending has climbed above 4 per cent in Germany and France, the highest since 2011. On the deposit side, banks have been slower to pass on rate increases to savers, the average overnight deposit rate for households across the euro area was 0.85 per cent in June, up from 0.15 per cent a year earlier but still well below the policy rate. That spread is a source of political friction in several capitals.

Banks, meanwhile, have benefited from the widening net interest margin. The ECB's June 2026 banking supervision report noted that significant institutions' return on equity reached 9.8 per cent in 2025, the highest since the single supervisory mechanism began. But credit growth has stalled: loans to non-financial corporations contracted 0.3 per cent year on year in June, the first annual decline since 2015. The ECB's bank lending survey for the second quarter showed a net tightening of credit standards for the sixth consecutive quarter, driven by risk perception and cost of funds.

The external shock that won't go away

What distinguishes this cycle from 2022 is the geopolitical durability of the energy shock. The Iran war, now in its fourteenth month, has removed roughly 2 million barrels per day of crude and associated gas from global markets. The Strait of Hormuz remains effectively closed to commercial shipping insured by Western underwriters. European LNG import capacity has expanded, Germany's floating terminals at Wilhelmshaven, Lubmin and Stade are operational, but global liquefaction capacity is fully subscribed until at least 2027. That structural tightness means gas prices are unlikely to revert to pre-2022 norms even if the conflict ends tomorrow.

Schnabel's reference to the "natural gas situation" being "particularly concerning" reflects this reality. The ECB's June projections assumed a TTF price of €35 per megawatt-hour for 2026; the current spot price is nearly double that. If the governing council updates its macroeconomic projections in September, as it typically does, the inflation path will shift up, and the case for a restrictive stance strengthens automatically.

Diverging views within the council

Not every council member shares Schnabel's urgency. François Villeroy de Galhau, governor of the Banque de France, argued in a speech last month that the ECB should "avoid over-tightening" given the lagged impact of previous hikes. Mario Centeno of Portugal has emphasised that services inflation, while elevated, is decelerating on a three-month annualised basis. The Italian and Greek central bank governors have privately expressed concern about the impact on sovereign funding costs. The June decision passed unanimously, but several members attached statements noting their preference for a data-dependent, meeting-by-meeting approach.

That consensus may fracture in September. The August flash estimate, due on 1 September, will be the last hard data point before the meeting. If headline inflation prints at or above 3 per cent, a plausible outcome given the gas price trajectory, the hawkish camp gains momentum. If it surprises to the downside, perhaps because industrial demand has weakened more than expected, the doves will argue for a pause. The ECB's own survey of professional forecasters, conducted in early August, puts the mean expectation for August headline inflation at 3.1 per cent.

What the September meeting must decide

The governing council faces three choices on 10 September: hike by 25 basis points and signal another move in October or December; hike by 25 basis points and keep guidance open-ended; or pause and wait for the September projections and October data. The first option aligns with Schnabel's interview and market pricing. The second buys flexibility but risks being read as dovish. The third would surprise markets and likely weaken the euro, importing further inflation via higher import prices, a dynamic the ECB has sought to avoid since 2022.