European Central Bank board member Isabel Schnabel said further interest-rate tightening will be necessary because inflation is unlikely to return to target over the medium term at current policy settings. Euro-area bond yields still slipped on Wednesday, as a sharp drop in crude oil prices outweighed her hawkish signal.
Germany's 10-year Bund yield fell to 3.195%, dropping back below the psychologically important 3.20% threshold after hovering near 15-year peaks last week. The two-year Schatz yield slipped to 2.781% over the same session, even as European Central Bank Executive Board member Isabel Schnabel warned that borrowing costs need to rise further.
Crude slide eases the inflation premium
Brent crude tumbled over 2.5% to trade near $86 a barrel, extending a multi-session selloff after media reports that the U.S. and Iran are closing in on an interim ceasefire deal covering transit through the Strait of Hormuz. The prospect of restored maritime transport helped dismantle the cost-push inflation premium that had built up across European interest-rate curves in recent weeks.
Schnabel says price pressure will stay above target
In an interview with Bloomberg News published Wednesday, Schnabel said inflation is unlikely to return to target over the medium term at the current policy rate and that further tightening will therefore be necessary. She added that inflation is likely to stay above 2% for an extended period because of elevated energy costs, and warned that waiting for those pressures to feed fully into wages would risk leaving the ECB "behind the curve".
Schnabel did not specify how many additional hikes might be needed, but said markets seem to understand the ECB's reaction function well, preserving flexibility beyond the next move.
Traders turn to the Jackson Hole keynote
With euro-area rate curves stabilizing below recent peaks, sovereign debt desks are now watching the Federal Reserve's Jackson Hole Economic Policy Symposium on Friday, where Fed Chair Kevin Warsh will deliver his inaugural keynote address. Traders will parse his remarks for signs the Fed intends to keep a high policy floor, a stance that could spill over into European rate markets.
Money markets are already pricing a potential 25-basis-point ECB rate hike in September, which has kept short-dated euro yields relatively anchored even as the broader curve eased.
Sources: ActionForex, Investing.com
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