By Marc Jones and David Milliken
LONDON, May 7 (Reuters) - The risk of higher inflation in the euro zone has risen as companies and households react to surging oil prices and supply snags, European Central Bank board member Isabel Schnabel said on Thursday, hinting at possible increases in interest rates.
Schnabel was joining a host of fellow rate-setters in backing likely rate hikes, probably as soon as June, to counter the ripple effects of the Iran war on consumer prices in the bloc, which imports
most of its fuel.
The German member of the ECB's board noted a growing share of euro zone companies were planning to increase prices despite subdued demand, while households had raised their inflation expectations.
"If the energy price shock broadens, monetary policy will need to tighten to contain the risk of second-round effects threatening medium-term price stability," she told an audience in London. "This risk has increased in recent weeks."
Schnabel went as far as saying that the surge in fuel prices may feed through the economy faster than during the last inflation surge in 2021-22 because "memories of that painful inflation episode are still fresh".
Investors price in three or, more likely, four ECB rate hikes over the next 12 months, which would lift the rate that the euro zone's central bank pays on bank deposits to 2.75%-3% from 2% currently.
Schnabel also appealed to governments and lawmakers to do their part in taming inflation, urging them to put public debt on a sustainable footing and to preserve the prudential rules put in place after the financial crisis.
"The alternative – allowing fiscal and financial dominance to quietly erode the space for monetary policy amid blurred mandates – would progressively hollow out independence and ultimately lead to higher inflation and lower growth," she said.
(Writing by Francesco Canepa; Editing by Alex Richardson)
