Isabel Schnabel, a member of the European Central Bank’s Executive Board, set out four lessons on running monetary policy in an unpredictable world in a speech in Frankfurt on 5 November 2026. She spoke at the ECB Conference on Money Markets and said the remarks were personal reflections as she reaches the end of her time at the ECB.
What happened
Schnabel said the past seven years moved the ECB from persistently low inflation to recurrent inflation shocks, and from a very accommodative stance to the fastest tightening cycle in its history. Her four takeaways follow.
1. Keep room to manoeuvre
Central banks should favour tools that can be adjusted quickly. Policy rates can change at every meeting, she said, while large-scale asset purchases keep supporting the economy long after buying stops. An instrument that is hard to reverse is itself a form of commitment.
She called pandemic-era forward guidance (telling markets in advance how policy will behave) too Odyssean, meaning it bound the ECB too tightly to a low-inflation world. She added that asset purchases remain useful for calming illiquid markets and countering deflation pressure when rates are at their effective lower bound.
She pointed to the Transmission Protection Instrument (TPI) as an example of separating market-stabilising tools from those that set the policy stance. It targets unwarranted, disorderly market moves that threaten how policy reaches the economy, under defined criteria.
2. Focus on the inflation outlook
Schnabel said the right response depends less on a shock’s nature than on what it does to projected inflation. The old rule was to respond to demand shocks and look through supply shocks. She called that distinction misleading, because shocks overlap and a large, persistent supply shock can push inflation above target through wages, indirect prices and expectations.
She said that households’ views on where prices will go over the medium to longer term have climbed since the recent jump in energy costs, drifting away from the ECB’s 2% target. She said the ECB responded in a timely, forward-looking way to the conflict in the Middle East and is now well positioned to address the current inflation challenge. She also said climate change, through more floods, heatwaves and droughts, feeds into prices and falls within the ECB’s primary mandate.
Services inflation, she noted, was still above 3% before the Middle East conflict began.
3. Protect monetary dominance
Monetary dominance means the central bank can pursue price stability without being constrained by fiscal or financial-stability worries. Schnabel said banks’ strong capital let the ECB raise rates without financial strain. She named two threats: the shift of finance from banks to non-bank intermediaries, which now hold assets on a par with banks, and rising public debt.
Euro area public debt as a share of GDP has risen by nearly 20 percentage points since the early 2000s. She cited IMF projections of US government debt reaching 145% of GDP in 2031, from 124% last year, and China’s reaching 122% from 99%. She added that hedge funds hold a growing share of sovereign debt, often financed through repos (short-term secured borrowing), so monetary policy is transmitted more rapidly.
What it means for you
The speech is not a rate decision and sets no policy. It does show how a senior ECB official thinks about inflation: expectations drifting from 2% and energy prices are being watched closely. If you hold euro assets or send money to or from the euro area, the ECB’s stance can affect rates and the exchange rate, which you can check with the currency converter.
Background
Schnabel’s speech follows other recent ECB news, including the ECB wage tracker and the announcement that Christine Lagarde will step down on 7 February 2027. For the basics, see what the ECB does.
