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Investing.com -- European Central Bank Executive Board member Isabel Schnabel warned on Saturday that inflation risks remain tilted to the upside despite the recent decline in energy prices following the U.S.-Iran ceasefire, reinforcing expectations that the central bank may need to raise interest rates further.

Speaking at the Petersberger Summer Dialogue in Germany, Schnabel said uncertainty surrounding the economic outlook remains elevated, even though the agreement between Washington and Tehran has reduced the likelihood of more severe disruptions to global energy supplies.

While oil prices have eased in recent days, Schnabel cautioned that prices are still expected to remain elevated as shipping through the Strait of Hormuz normalizes only gradually. Higher energy costs could continue feeding into broader price pressures, particularly through goods, food and services inflation, she said.

The remarks underscore the ECB's concern that the inflationary impact of the Middle East conflict may prove more persistent than initially expected. Policymakers have warned that higher energy prices can ripple through supply chains, raise manufacturers' costs and eventually translate into higher prices for consumers.

Schnabel reiterated that the ECB is expected to raise interest rates further to return inflation to its 2% medium-term target. She also noted that consumer inflation expectations have increased, although wage growth has yet to show signs of accelerating significantly.

The comments come ahead of next week's euro zone inflation report, where economists expect headline inflation to ease to 3.0% in June from 3.2% in May, while core inflation is forecast to remain unchanged at 2.6%, suggesting underlying price pressures are proving more persistent.

Beyond inflation, Schnabel said higher energy costs are weighing on household confidence and consumption while increasing production costs, particularly for manufacturers. She added that euro zone growth continues to receive support from government investment and strong spending on artificial intelligence, while the labor market remains resilient despite cooling demand for workers.

Schnabel also warned that elevated valuations across financial markets and higher leverage are increasing risks to financial stability, adding another challenge for policymakers as they seek to bring inflation under control without derailing economic growth.

Reporting by Roushni Nair