ECB Executive Board Member Isabel Schnabel argued that the central bank should not automatically “look through” the latest energy shock simply because it originates on the supply side. Speaking at the 8th Annual EC-EIB-ESM Capital Markets Seminar in Luxembourg on September 30, she said what matters is whether a shock pushes the projected inflation path above target over the relevant policy horizon. In her words, the nature of the shock determines the appropriate “speed” at which inflation is returned to target, “not the need to respond at all.” Schnabel defended the ECB’s 50bp of tightening since June, which lifted the deposit rate from 2.0% to 2.5%, as an appropriate response to the deterioration in the inflation outlook rather than an “insurance hike.”
Her strongest warning concerned the risk that higher energy costs spread into underlying inflation before policymakers react. Schnabel said “central banks cannot wait for these effects to materialise,” arguing that waiting until firms have visibly raised prices and wages have already adjusted would mean acting too late. The ECB’s September projections put headline HICP inflation at 3.0% this year and 2.1% in 2028, while core inflation is expected to rise to 2.6% in 2027 before easing to 2.3% in 2028. Since the projection cut-off, however, oil and gas prices have moved closer to the adverse scenario. Schnabel also pointed to rising import and producer prices as early evidence that higher input costs are moving through production chains, even though the pass-through is “not yet visible in core inflation.”
At the same time, Schnabel stopped short of signalling an immediate next hike. She emphasized that the ECB still needs to assess how strongly the economy responds to the tightening already delivered, noting that some models imply a larger hit to GDP than assumed in the baseline. But she also questioned whether policy is yet clearly restrictive, saying that “recent robust credit dynamics suggest that financial conditions are not yet restrictive” or that some lending, particularly related to AI investment, has become less interest-rate sensitive. The overall message is therefore hawkish but conditional: the ECB is prepared to act before second-round effects become entrenched, while incoming data on inflation expectations, demand resilience and policy transmission will determine how much additional tightening is required.
Key Takeaways
- Schnabel rejected the idea that the ECB should automatically “look through” an energy shock simply because it originates on the supply side.
- She argued that the appropriate policy response depends on how the shock affects the projected inflation path, not on whether it is classified as supply- or demand-driven.
- The ECB’s 50bp of tightening since June, lifting the deposit rate from 2.0% to 2.5%, was presented as a direct response to the worsening inflation outlook rather than an “insurance hike.”
- Schnabel’s strongest warning was that “central banks cannot wait for these effects to materialise,” because waiting for visible second-round effects in prices and wages could mean acting too late.
- Core inflation is still projected at 2.6% in 2027 and 2.3% in 2028, while oil and gas prices have since moved closer to the ECB’s adverse scenario.
- She pointed to rising import and producer prices as early evidence that higher input costs are moving through the production chain, even though the pass-through is “not yet visible in core inflation.”
- The speech also highlighted inflation expectations, demand resilience and policy transmission as the three key areas to watch in coming months.
- Schnabel stopped short of explicitly signalling an imminent hike, noting uncertainty over how strongly previous tightening will slow the economy.
- But she also said “recent robust credit dynamics suggest that financial conditions are not yet restrictive,” keeping the door open to further tightening if underlying inflation pressures broaden.
