The European Central Bank (ECB) published a speech by Executive Board member Isabel Schnabel arguing that monetary policy needs flexible instruments, decisions guided by the inflation outlook and protection from fiscal and financial pressures. Speaking at the ECB Conference on Money Markets 2026 in Frankfurt, she also advocated a balance sheet no larger than necessary. Policy rates can be adjusted more quickly than asset purchases, while supply shocks can require a response if they threaten persistent inflation. Following the latest energy shock, consumer inflation expectations over the medium to longer term have risen away from the 2% target. Rising government debt and the growing role of leveraged nonbanks in sovereign bond markets risk forcing central banks into market interventions that interfere with monetary policy. Schnabel opposed bank deregulation and called for stronger nonbank oversight and a more effective macroprudential framework to address leverage, funding risks and interconnectedness. Stronger regulation would also support considering nonbanks’ access to central bank facilities. Credible fiscal consolidation and measures to raise productivity would reduce the risk that government financing needs constrain monetary policy. On implementation, Schnabel reviewed the ongoing rundown of the asset purchase programme and pandemic emergency purchase programme portfolios, which could in principle fall to zero unless renewed purchases become necessary at the effective lower bound. Banks’ use of standard refinancing operations should reveal their underlying liquidity needs as excess liquidity declines. She envisaged introducing structural refinancing operations with longer maturities before gradually building a structural securities portfolio once legacy holdings have declined sufficiently. Standard refinancing operations would continue to supply the marginal unit of liquidity in response to banks’ demand, avoiding the need to estimate reserve requirements in advance or maintain an additional buffer.
ECB Executive Board member Isabel Schnabel advocates policy flexibility and a smaller balance sheet
In a speech at the ECB Conference on Money Markets 2026, European Central Bank Executive Board member Isabel Schnabel advocated flexible policy tools and responses based on shocks’ inflation effects rather than their classification. She opposed bank deregulation and urged stronger nonbank oversight and prudent fiscal policy to prevent financial or government financing pressures from constraining monetary policy. She also outlined a transition toward a smaller balance sheet, with banks’ demand guiding liquidity provision and structural refinancing operations preceding a structural securities portfolio.