Schnabel: preserve flexibility and focus on the inflation outlook

Speech and main message

Isabel Schnabel delivered a speech titled "Navigating stormy waters: reflections on monetary policy" at the ECB Conference on Money Markets 2026 in Frankfurt am Main on 5 November 2026. Speaking as she reaches the end of her journey at the ECB, she characterised the past seven years as an extraordinary journey: a shift from persistently too-low inflation to recurrent inflationary shocks, from a historically accommodative monetary policy stance to the fastest tightening cycle in the history of the ECB, and from a deeply integrated global economy to one increasingly shaped by fragmentation and geopolitical tensions. She set out four key takeaways.

Inflation risks and drivers

Schnabel said the rapid increase in the share of goods and services experiencing inflation above 2% signalled more broad-based price pressures. She outlined two features not sufficiently accounted for in analytical frameworks: a steepening of the Phillips curve, in part due to more frequent price changes, and a significant role for rising unit profits in the post-pandemic inflation surge, in contrast to the 1970s when inflation was almost entirely driven by growth in unit labour costs. She noted overlapping shocks – including supply-chain disruptions, pent-up demand, fiscal and monetary support, Russia’s unjustified invasion of Ukraine and a latest energy shock – and said consumer inflation expectations over the medium to longer term have increased and gradually moved away from our 2% target. She also said climate change is affecting price dynamics and referred to “climateflation.”

Policy path and instruments

A central message of Schnabel’s remarks was to preserve room for manoeuvre by avoiding commitments that tie policy to a particular view or model. She said forward guidance during the pandemic was "too Odyssean" because it tied the hands of policy-makers to a world of persistently low inflation. She emphasised that the primary monetary policy instrument is the set of key policy rates, noting that policy rates can be adjusted swiftly at each meeting while large-scale asset purchases continue to provide accommodation long after purchases have ended. She said asset purchases remain useful to stabilise illiquid markets and at the effective lower bound, but instruments that are difficult to reverse are themselves a form of commitment. Separating instruments used to stabilise markets from those used to calibrate the policy stance can preserve flexibility; the Transmission Protection Instrument (TPI) embodies this principle as a dedicated tool to address unwarranted, disorderly market dynamics subject to clearly defined criteria.