ECB's Schnabel still sees tough 'last mile' in inflation fight

FRANKFURT (Reuters) -The European Central Bank still faces a tough "last mile" in its fight against high inflation, as evidenced by stubbornly high growth in the prices of services, ECB board member Isabel Schnabel said in an interview published on Friday.

Schnabel, the most influential among the hawkish policymakers who drove the ECB's steepest ever streak of interest rate hikes in 2022-23, stuck to her cautious tone even as many of her colleagues were opening the door to more rate reductions.

"We continue to expect inflation to gradually converge to our 2% target over the course of next year," Schnabel told German daily Frankfurter Allgemeine Zeitung. "However, persistent services inflation shows that the 'last mile' of the fight against inflation is particularly difficult."

After lowering rates in June, the ECB left them on hold last week but President Christine Lagarde said its next meeting in September was "wide open", with several policymakers openly considering more cuts as inflationary pressures ease.

Schnabel said "some data...was not fully in line" with the ECB's expectations at the time of the June rate reduction and that this would not "automatically" be followed by "a whole series of further cuts".

"The pace of rate cuts will depend on the data," she said. "The same can be said for how far interest rates can be cut overall – this is also uncertain at present."

Schnabel's last-mile narrative was the subject of a lively debate at the ECB's policy symposium earlier this month, where an academic paper predicted an "easy last kilometre" for the euro zone's central bank.

Even the head of the Bundesbank, a traditionally hawkish institution, has opened the door to rate cuts, expecting inflation to fall back to 2% by the end of next year or early 2026 at the latest.

"I already expect, as I have already indicated, that if the data remains the same over the next twelve months, there may be a chance at some meeting or other that we will be able to reduce interest rates further," Bundesbank President Joachim Nagel told reporters in Rio on Thursday.

Euro zone inflation was 2.5% in June. July figures will be published on Wednesday.

(Reporting By Tom Sims and Jan Strupczewski in Rio de Janeiro; Writing by Francesco Canepa, Editing by William Maclean, Kirsten Donovan)