Reflections on a Shifting Economic Landscape
Isabel Schnabel, Member of the Executive Board of the European Central Bank (ECB), delivered a speech titled "Navigating stormy waters: reflections on monetary policy" at the ECB Conference on Money Markets 2026 in Frankfurt am Main on Nov. 5, 2026.
In her address, Schnabel described the past seven years as an "extraordinary journey" for central banking. She noted that the global economy has moved from a period of persistently low inflation to one marked by recurrent inflationary shocks. This shift coincided with a transition from historically accommodative monetary policy to the fastest tightening cycle in ECB history.
Schnabel also highlighted a structural change in the global environment, noting a move from a deeply integrated global economy to one increasingly shaped by fragmentation and geopolitical tensions. She stated that these experiences have taught her about conducting monetary policy in a world that has become less predictable.
Key Takeaways for Central Banks
Schnabel outlined four key takeaways from her tenure, beginning with the importance of preserving room for maneuver. She argued that central banks should prioritize instruments that allow them to adjust monetary policy quickly as conditions change. To maintain this flexibility, she advised against making commitments dependent on specific economic environments or classes of models.
She explained that prior to the pandemic, inflation was chronically underpredicted. According to Schnabel, globalization and the integration of China had structurally lowered the global cost of producing goods, putting downward pressure on inflation. Simultaneously, weakened balance sheets resulting from the global financial and sovereign debt crises contributed to this environment.
Looking at the post-pandemic period, Schnabel reported that inflation was significantly driven by rising unit profits rather than just unit labor costs. She noted that this feature was not sufficiently accounted for in previous analytical frameworks used by central banks.
Future Pressures and Policy Adjustments
Schnabel identified several factors currently influencing economic stability. She stated that rising investment needs for green and digital transitions, alongside a changing geopolitical environment, have turned a past savings glut into a bond glut. This shift puts upward pressure on inflation and the natural rate of interest, known as r*.
Concluding her remarks, Schnabel advised that central banks should expect the unexpected. She emphasized the need to avoid becoming too attached to particular views of the world or specific economic models as they navigate future challenges.