ECB Warns on Inflation Risks and Central Bank’s Prepared Response

Executive Board member of the ECB, Isabel Schnabel, reiterated the need for early action to prevent inflation from becoming entrenched. In a recent interview, she warned about the risks of so-called 'second-round effects' of inflation persisting across the Eurozone. Schnabel emphasized that inflation is likely to remain above the 2% target of the ECB for an extended period, potentially feeding through into wage negotiations and broader inflationary pressures. She highlighted the importance of keeping inflation expectations firmly anchored—a challenging task given the current economic dynamics in the Eurozone. The financial markets seem to understand the ECB's reaction function well, but any future monetary adjustment will depend on incoming data. Schnabel is particularly concerned about the natural gas situation, where prices have risen by over 130% last year, which could further increase inflationary pressures without adequate policy intervention.