ECB member discusses monetary policy amid overlapping shocks

Isabel Schnabel, a member of the ECB Executive Board, delivered a speech at the 8th Annual EC-EIB-ESM Capital Markets Seminar discussing the challenges of monetary policy in a world of overlapping shocks.

She highlighted that inflation has returned and is impacting daily life, with new shocks following the post-pandemic inflation surge. The ECB has adapted by increasing transparency through framework guidance, clarifying its reaction function based on inflation outlook and risks, and taking timely interest rate hikes since June, raising rates by 50 basis points to bring inflation back to 2%.

The ECB’s response depends on how shocks influence projected inflation paths. While some argue that supply shocks should be ‘looked through,’ the ECB considers the effect on inflation expectations and the projected inflation path, responding with policy adjustments when necessary.

In a complex environment with overlapping shocks—such as energy, demand, and geopolitical factors—the ECB assesses the size, persistence, and transmission of each to inform policy. The focus is on underlying inflation measures, which are less volatile and more indicative of medium-term inflation trends.

Inflation forecasts are uncertain, especially regarding energy prices, which are influenced by futures market expectations. The ECB complements baseline forecasts with scenario analysis and emphasizes underlying inflation to avoid misinterpretation of headline inflation movements.

Recent policy decisions, including rate increases, are justified by projections showing inflation remaining above target due to indirect and second-round effects, such as higher input costs and pass-through to consumer prices. Incoming data on inflation expectations, demand resilience, and interest rate effects are continuously monitored to adjust policy as needed.

In conclusion, Schnabel emphasized that in a world of overlapping shocks, maintaining trust through clear communication and timely policy actions is essential to prevent shocks from becoming embedded in persistent inflation.