Isabel Schnabel, a member of the ECB Executive Board, used the ECB Conference on Money Markets to draw four lessons from the past seven years, a period that moved from persistently low inflation to recurrent inflationary shocks and the fastest tightening cycle in ECB history. She warned that central banks must preserve room for manoeuvre by avoiding overly firm commitments, especially when policy instruments can become difficult to reverse.
Schnabel noted that the pandemic arrived after a long stretch of inflation below the 2% target, a situation supported by globalisation and China’s integration that had kept production costs low. The pandemic, however, created a structural break, shifting the global savings‐investment balance toward a bond glut and pushing up the natural rate of interest, r*. At the same time, the share of goods and services with inflation above 2% rose rapidly, signalling broader price pressures, while services inflation remained above 3% before the Middle‐East conflict.
She argued that the traditional distinction between demand‐side and supply‐side shocks is less useful when shocks overlap, as they have with the pandemic, the Ukraine war, rising energy prices and now AI‐driven investment and defence spending. The ECB’s response to the latest energy shock has already seen medium‐to‐long‐term consumer inflation expectations drift away from the 2% target, prompting a timely policy reaction.
To retain flexibility, Schnabel stressed the importance of separating market‐stabilisation tools from the primary monetary‐policy instrument – the set of key policy rates, which can be adjusted swiftly at each meeting. She highlighted the Transmission Protection Instrument (TPI) as a dedicated tool to address disorderly market dynamics without committing the ECB to large‐scale asset purchases that are harder to unwind.
Finally, Schnabel warned that rising public debt – up by nearly 20 percentage points as a share of GDP since the early 2000s – and the growth of non‐bank financial intermediaries, which now hold assets comparable to banks, could erode monetary dominance. She credited the resilience of the banking sector, built on post‐crisis reforms, for allowing the ECB to tighten forcefully without destabilising the financial system, and concluded that the ECB is now well positioned to meet the current inflation challenge.