By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel’s Reuters interview today confirms almost point for point the argument we made here yesterday: a June rate hike has become very hard to avoid, but it is premature to infer a sequence of moves.

We argued that reluctance inside the Governing Council had not disappeared, but that the case for waiting was fading as the Middle East shock persisted, energy prices stayed elevated and concern about pass-through moved well beyond the hawkish corner. Schnabel has now said it more clearly than anyone else.

Her message went beyond the idea that June merely remains open to modest policy tightening. Rather, as she put it, “From today’s perspective, I think a rate hike in June will be needed”; looking through the shock is “no longer an option”; and – importantly – even the war’s immediate end would not remove the need for a policy response.

That closely matches our argument yesterday. The ECB can be unhappy about tightening into a weak economy, but the hurdle for another hold has risen sharply. Waiting now requires a credible case — already hard to imagine — that the shock is not persistent, broad or dangerous enough to warrant action.

Schnabel makes the opposite case, saying the conflict has lasted longer than hoped, the oil futures curve is above the ECB’s adverse scenario at longer horizons, and the shock is pushing inflation away from target over the horizon relevant for monetary policy.

In April, the ECB could still describe the shock as something to monitor while waiting for more evidence on duration, propagation and second-round effects. By late May, according to Schnabel, persistence is no mere hypothetical risk, but rather the fact that changes the policy calculus.

“Given the size and the persistence of the current shock, looking through is no longer an option in my view,” she said.

Nor does she encourage the idea that a peace deal alone would be sufficient. That was perhaps the only remaining way in which June could still have become “the new April.” Pointing to the damage already done, Schnabel narrows that path, echoing our view. “So, even then, I believe that a monetary policy reaction would be needed,” she said.

This also confirms a core element of our argument: the June case rests on persistence, pass-through and expectations, not on higher oil prices alone. Schnabel explicitly warns against focusing on headline inflation alone. What matters, she says, is underlying inflation.

On that front, she is concerned. She sees “significant upside risks” to non-energy industrial goods inflation compared with the March projections, and expects higher costs to move through global supply chains and eventually appear in goods prices.

She is more cautious on wages, but only because wage negotiations are staggered and agreements have long durations, so hard data come late. “So, if we wait for second-round effects to appear in hard data on wages, we will certainly be too late,” she said.

That is the logic of a preemptive move and helps explain why, as we observed yesterday, the case for a June hike has migrated beyond the Council’s hawkish faction. It is now about preserving the credibility of the reaction function before the shock becomes a broader inflation process.

Schnabel makes that point directly in her discussion of markets, where she rejects the idea that market tightening can do the ECB’s job. “Markets reflect expectations about our policy, but they cannot do our job,” she said.

If the ECB judges market expectations to be appropriate, it eventually has to act, she said. Otherwise, there will be a disconnect between the ECB’s actual reaction function and what markets believe it to be.

Put differently, if markets price action because the ECB has signaled that the shock is large and persistent enough to require action, and the ECB then does not act without a clear improvement in the facts, the credibility problem shifts from inflation expectations to the policy signal itself.

Schnabel does not make the claim that credibility is already in danger. Longer-term expectations remain well anchored, and she does not suggest that the ECB has lost control of the narrative. “But this anchoring is conditional on us responding to an inflation surge in a proper way,” she said.

That is the point we made yesterday in different words. A modest hike can be understood less as a conventional demand-management move than as an insurance move against persistence, pass-through and a weakening of confidence in the ECB’s willingness to react.

At the same time, Schnabel does not turn this into a call for a full hiking cycle. Asked whether one hike would make sense or imply more later, she stayed firmly within the ECB’s meeting-by-meeting language.

That is again consistent with our reading of things. The case for June has hardened, but the case for a predetermined series has not. A 25bp hike would not by itself settle July, September or anything beyond. It would say that the current shock has crossed the threshold for action; it would not say that every subsequent meeting must deliver another move.

Schnabel’s interview thus separates two propositions that markets can easily conflate: June is becoming very difficult to avoid, but the post-June path remains conditional.

The growth side of the trade-off remains real. Schnabel recognizes that an adverse supply shock creates a dilemma because tighter policy can worsen the negative impact on the economy. She also says incoming data point to a stronger hit to growth, with consumer confidence down sharply and services slowing significantly.

But that does not rescue the hold case. It merely explains why the June move, if delivered, is still more likely to be a modest preemptive step than the start of an aggressive cycle.

Schnabel’s interview should therefore be read as a confirmation of the position we set out yesterday: the ECB still dislikes tightening into weak growth, but the arguments for waiting have become increasingly hard to sustain.