ECB's Schnabel says rates must increase further on inflation risks and ECB must prevent second round effects early on

• Market seems to understand ECB reaction function well, and the extent of tightening is to depend on incoming data.
• Natural gas situation particularly concerning.
• Economy looks to be gaining further momentum.
• Inflation likely to top 2% for extended period.

Schnabel sits on the Executive Board and has consistently occupied the hawkish end of the Governing Council spectrum, so remarks of this kind read as confirmation of the direction of travel rather than a surprise; the weight is in the messenger, since board members tend to frame the staff view more than national governors do. The emphasis on preventing second round effects early is the standard argument used to justify front-loaded tightening rather than gradualism, and historically when that framing gains currency on the Council it has tended to be followed by larger single moves and a higher peak than the curve had priced. The nod to markets understanding the reaction function, with the extent of tightening data-dependent, is a formulation that raises the beta of the front end to each subsequent inflation print; Schatz and the short-dated ESTR strip are the direct transmission channel. The natural gas reference matters because energy-driven supply shocks have split central banks before between looking through them and responding to the pass-through, and the second-round-effects language here signals the latter camp. Worth watching is whether other Council members echo the 'early' prevention framing in coming days, and how the remarks sit against the prevailing pricing of the terminal rate rather than any single meeting.