ECB Governing Council Member: Rate Hike Needed in June Even If Iran Deal Reached

May 26 (Reuters) – Isabel Schnabel, a member of the European Central Bank’s (ECB) Executive Board and a contender for ECB president, said even if the U.S. and Iran reach a peaceful agreement, the ECB should still begin hiking interest rates in June. She argues the ongoing energy shock has lasted far longer than expected, as damage to energy infrastructure and supply chain disruptions push high energy costs to ripple across the broader economy. Schnabel noted Eurozone inflation has climbed to 3%, with additional upside risks ahead. Inside the ECB, officials are concerned that elevated energy costs are driving up prices for goods and services via a "second-round effect," which is creating stickier inflationary pressures. She stressed the ECB’s prior baseline forecasts already factored in two interest rate hikes, and a single move may not be enough to meet the inflation control target. Markets have already priced in expectations for two upcoming increases to the ECB’s deposit rate, and are assigning a 50% probability to a third rate hike over the next year. However, the ECB will not commit to a pre-determined path in advance; it will continue adjusting policies dynamically based on data at each policy meeting. At the same time, Schnabel cautioned that sustained high energy prices could also weigh on Eurozone economic growth more than forecast, building pressure from both slowing growth and rising inflation.