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)