NextFin News - ECB Governing Council member Isabel Schnabel is keeping the spotlight on inflation even as Europe’s energy shock has eased from its most violent phase. Her hawkish stance lands at a delicate moment for policymakers who are trying to balance slower growth against a fresh price shock: the euro area may get relief from lower oil prices, but the ECB’s own projections still point to inflation staying above target for much of the next two years.
The tension matters because the ECB’s June 2026 staff projections already show a long period of above-target inflation. The baseline sees HICP inflation averaging 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028, with inflation peaking at 3.4% in the third quarter of 2026 and staying above 3.0% until early 2027. Energy inflation is projected to reach 12.5% in the third quarter of 2026 before fading later, a profile the ECB says is driven by the Middle East conflict and the pass-through from higher crude oil prices to consumer fuel prices.
That combination leaves the ECB in a familiar bind. The central bank entered this period of higher energy costs with inflation already near 2%, and its recent policy statements have stressed that upside risks to inflation and downside risks to growth have both intensified. In practice, that means any peace deal that cools oil prices can reduce one source of pressure, but it does not automatically solve the central bank’s problem. The ECB has been explicit that indirect effects, wage spillovers and persistent services inflation can keep inflation elevated even after the first energy shock fades.
For markets, the message is simple: the ECB is still more worried about inflation persistence than about declaring victory over the price shock. That posture matters for rate expectations, for euro-area bonds and for the broader debate over whether a temporary energy reprieve can justify a faster easing cycle.
Market Reaction and Policy Context
The immediate policy backdrop is the ECB’s 30 April decision to keep its three key interest rates unchanged. In that statement, the Governing Council said incoming information had been broadly consistent with its previous assessment of the inflation outlook, but that upside risks to inflation and downside risks to growth had intensified. It also said the euro area entered the energy shock with inflation at around the 2% target and that the economy had shown resilience over recent quarters.
That wording matters because it shows how the ECB is framing the current shock. The central bank is not treating higher energy prices as a one-note inflation story. Instead, it is watching whether the shock feeds into broader price-setting, including food, services and wages. The June 2026 staff projections make the same point: headline inflation is expected to rise quickly on energy, while non-energy inflation is also projected to stay above target for an extended period. The baseline sees inflation excluding energy and food at 2.5% in 2026 and 2027, before easing to 2.2% in 2028.
The policy implication is straightforward. A peace deal can lower oil prices and help headline inflation mechanically, but the ECB’s reaction function depends on whether that improvement looks durable and whether underlying inflation cools with it. If energy prices fall while core inflation remains sticky, the central bank can still justify a cautious stance. That is why Schnabel’s inflation focus carries weight: it signals that one favorable geopolitical development may not be enough to change the ECB’s broader assessment.
“The implications of the war for medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock and the scale of its indirect and second-round effects.”
The ECB’s own language points to the same conclusion. Even if the energy shock becomes less acute, the central bank must still evaluate the persistence of inflation expectations, the pass-through to household prices and the effect on wages. That makes the policy path less about the headline move in oil and more about the second round.
Why A Peace Deal Does Not End The Inflation Story
The core of the case is that energy relief is not the same thing as inflation relief. The ECB’s projections already show how large the energy component is expected to be in the second half of 2026, but they also show how quickly inflation can remain above target once the first shock hits broader components. Headline inflation is expected to average 3.0% in 2026, then stay above 3.0% until early 2027, while core inflation remains at 2.5% in 2026 and 2027. That is enough to keep policymakers cautious even if oil retreats from its crisis peak.
The transmission mechanism is simple. Crude oil affects fuel prices quickly. Gas and electricity tend to feed through more slowly. Then there is the lagged effect on transport costs, food processing, industrial inputs and ultimately wage demands. The ECB’s June staff projections say the profile of energy inflation in 2026 is highly uncertain and depends especially on oil prices and refining margins. It also says the indirect effects from higher energy prices are expected to peak in the second half of 2027.
That lag is one reason the ECB may not move quickly on any temporary peace dividend. If policymakers cut rates too fast after a drop in energy prices, they risk easing financial conditions before the second-round effects have fully shown up in the data. If they wait too long, they risk overtightening into a softer growth environment. Schnabel’s hawkish tone suggests she is leaning toward the first risk as the more dangerous one.
“Monetary policy cannot lower energy prices directly. But it must assess the extent to which higher energy costs spill over into other prices – what we call ‘indirect effects’ – and risk triggering second-round effects through wages and price-setting.”
That framing leaves little ambiguity about the ECB’s priorities. Even a meaningful peace deal in the Middle East would not erase the central bank’s concern that inflation could settle above target again if price pressures broaden. The ECB is effectively asking not whether oil is down today, but whether the rest of the inflation basket will stay calm tomorrow.
What Investors Should Watch Next
The next test is not just the headline inflation rate, but the composition of the next few prints and the ECB’s reading of them. Investors will watch euro-area HICP data, energy assumptions, wage trends and the next ECB communication for signs that the Governing Council is becoming more confident about inflation returning sustainably to 2%. A sharper drop in oil and refined-fuel costs would help the near-term picture, but it would need to be matched by softer services inflation and weaker second-round effects to change the policy debate materially.
That makes the market response potentially uneven. Front-end rates may still be sensitive to any downshift in inflation expectations, but longer-dated bond yields will also reflect the ECB’s determination not to declare victory too early. For the euro, the balance is more complicated: a lower oil price can support growth and relieve import costs, but a hawkish ECB can still keep policy expectations firmer than the market would otherwise expect.
For now, Schnabel’s message is best read as a warning against overinterpreting any peace-driven drop in energy prices. The ECB can welcome cheaper oil without assuming the inflation problem is solved. In this cycle, the first round is about geopolitics, but the second round is about the ECB.
The market may want closure from the peace deal. The ECB wants proof that inflation is actually done.
Explore more exclusive insights at nextfin.ai.
