Interest rates must rise further on inflation risks, ECB's Schnabel tells Bloomberg

Aug 26 (Reuters) - European ‌Central Bank ​board ​member Isabel Schnabel said interest rates must rise further as the conflict in ‌the Middle East drags on and the ⁠strong euro zone economy poses upside risks to inflation, ‌in an interview with ‌Bloomberg News published on Wednesday.

"At the current policy rate, inflation is unlikely to return to target ​over the medium term, and therefore further tightening will be necessary," Schnabel told Bloomberg.

Three sources ⁠told Reuters on Tuesday that ECB policymakers were leaning towards a ​rate hike at their September meeting to contain the inflationary impact of the ​Iran war, but have little ‌appetite to signal further tightening beyond that.

Schnabel said consumer-price growth is likely ⁠to exceed 2% for an “extended period” due to high energy costs, and that acting only when this ⁠feeds into wages would leave policymakers “behind the curve".

The ECB raised ​borrowing costs for the first time in nearly three years in June to prevent a war-fuelled rise in ‌energy prices from spreading too widely in the economy.

Schnabel said markets “seem to ‌understand our reaction function very well,” without specifying ⁠how much further borrowing ‌costs are likely ​to rise.

(Reporting by Anusha Shah in Bengaluru; Editing by Jacqueline Wong and Andrew ‌Heavens)

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