By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel said further monetary policy tightening would be necessary, with the prolonged Middle East conflict and unexpectedly resilient economic activity resulting in upside inflation risks.

"At the current policy rate, inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary," Schnabel said in comments made to Bloomberg published Tuesday.

"Especially in the current environment of resilient aggregate demand, it is critical to prevent the occurrence of second-round effects early on because acting late could necessitate more tightening," she said.

Schnabel said consumer price growth would probably persist above the ECB's 2% target for an "extended period" because of elevated energy costs, warning that waiting for price pressures to feed into wages before responding would leave policymakers "behind the curve."

She declined to indicate how much further rates might need to rise, saying financial markets "seem to understand our reaction function very well."

"How much further tightening is needed will depend on incoming data," she said.

Schnabel said the euro area economy had continued to outperform expectations, with fiscal policy, increased defense spending and artificial intelligence all contributing significantly.

"The economy continues to be stronger than expected, and incoming data have repeatedly surprised on the upside," she said.

"Sentiment indicators suggest that growth is gaining further momentum," Schnabel said. "So, compared with the June staff projections, I see risks to economic growth as being tilted somewhat to the upside.".

On inflation, which accelerated to 2.9% in July, Schnabel said energy-price pressures were becoming more persistent beyond oil, describing developments in natural gas as "particularly concerning" in light of Europe's low storage levels.

"This poses material upside risks to inflation," she said. "The longer the conflict lasts, the higher the risk and intensity of indirect and second-round effects, especially if aggregate demand remains resilient."