Currently, the European Central Bank (ECB) is facing the dual challenges of high inflation and geopolitical conflicts. Several key officials have signaled interest rate hikes, and market expectations for a June rate increase continue to rise. At the same time, the principle of central bank independence is being challenged globally, with controversies arising in both Europe and the United States, making the overall direction of monetary policy a focus of close attention.

Key statement: If the conflict with Iran continues, the European Central Bank will inevitably raise interest rates.

European Central Bank (ECB) Executive Board member Isabel Schnabel said in a speech on Thursday (May 7) that the ECB will have to raise interest rates if the war in Iran leaves a more lasting impact on inflation. She pointed out that the proportion of companies planning to raise prices is rising rapidly, supply chains are experiencing continued disruptions, households are constantly adjusting their inflation expectations, and the memory of the last inflationary shock is still fresh, meaning the effects of the current crisis will manifest more quickly than before.



Schnabel emphasized that "if the energy price shock expands, monetary policy will need to be tightened to curb the risk of a second-round effect threatening medium-term price stability. This risk has increased in recent weeks." Although the current inflation rate is well above the ECB's 2% target, the bank has not yet raised interest rates, mainly because the ripple effects of rising energy prices continue to unfold, and policymakers prefer to wait for more economic data. However, ECB President Christine Lagarde has previously hinted that a rate hike is possible in June.

Officials are divided: most favor raising interest rates, while a minority hold a cautious attitude.

Within the European Central Bank, there is some disagreement regarding interest rate hikes. Several officials have clearly stated their preference for raising rates as soon as possible.

Slovak Central Bank President Peter Kazimir said a rate hike next month is almost inevitable; European Central Bank Governing Council member and Bundesbank President Joachim Nagel said on Thursday that inflation in 2026 could be significantly higher than expected before the Middle East conflict, and he currently expects inflation to average around 2.7% this year, which could be even higher if the situation worsens.

Nagel pointed out that the current damage to oil and gas infrastructure means it may take some time to restore previous production levels. "If the outlook does not improve significantly, I expect we will raise interest rates in June." He added that assuming the situation remains stable, the German economy is still expected to grow by 0.5% in 2026, driven by better-than-expected economic performance up to March.

In contrast, Francois Villeroy de Galhau, the outgoing governor of the Bank of France who will step down before the next policy meeting, is taking a cautious approach, believing that rising energy costs have not yet caused enough damage to prompt a policy response from the European Central Bank. However, the market has already given clear expectations that the ECB will raise interest rates by at least 25 basis points twice this year.

Deep-seated concerns: Central bank independence faces global test

In her speech, Schnabel also emphasized that as adverse supply shocks become more frequent, it is essential to maintain the independence of central banks and ensure their ability to tighten policy when necessary. She stated that the European Central Bank has made it clear that it will take all necessary measures to bring the current 3% inflation rate back to its target level, and that maintaining the central bank's policy operating space is crucial.

Behind this statement lies the test of the principle of central bank independence globally. Established in the 1980s, this principle's core tenet is the belief that technocratic decision-making leads to better economic outcomes. In the United States, President Trump has launched attacks on the Federal Reserve, including personal insults and criminal charges, and has continued to pressure the Fed to cut interest rates. Schnabel cited a key message conveyed by Federal Reserve Chairman Jerome Powell at his final press conference last week: "Central bank independence is under threat."

While Europe has not witnessed similar extreme situations, related controversies have emerged, primarily revolving around the early resignation of French central bank governor Villeroy. Opponents argue that this was an attempt by certain forces to prematurely appoint a successor. Schnabel emphasized that uninterrupted decision-making is crucial to the ECB's mission, and that central bank independence is not a technocratic preference, but a commitment to safeguarding the value of public money.

Overall , the energy price shocks brought about by geopolitical conflicts, persistently high inflation, and challenges to the independence of central banks together constitute the complex background of the European Central Bank's monetary policy. Whether or not interest rates will be raised as scheduled in June may become a key juncture affecting global financial markets.