In a speech at the Hoover Monetary Policy Conference, European Central Bank Executive Board member Isabel Schnabel argued that evidence of a re-flattening Phillips curve after the post-pandemic inflation episode supports keeping euro area policy rates close to their current level, which she characterised as firmly neutral. She presented this “steady hand” approach as a way to look through short-term headline inflation volatility while remaining focused on medium-term price stability. The remarks linked the post-pandemic inflation surge to non-linear inflation dynamics, including state-dependent price-setting and shifts in near-term inflation expectations, and stressed that policy conclusions depend on both Phillips curve properties and the anchoring of expectations. Near-term factors such as falling energy prices and a stronger euro could dampen headline inflation and potentially push it below 2% in the short run, but she highlighted two medium-term forces that could keep underlying inflation under upward pressure: large-scale fiscal expansion and renewed protectionism. On fiscal policy, she pointed to Germany’s easing of its constitutional debt brake for defence-related spending and its commitment to spend EUR 500 billion over 12 years on infrastructure and the green transition, alongside the European Commission’s invitation for Member States to activate the national escape clause for higher defence spending. On tariffs, she argued that the net impact could be inflationary once supply shocks, pass-through behaviour and global value-chain amplification are considered, noting that EU retaliation has so far focused on final consumer goods to limit broader cost effects but could widen to intermediate goods if the conflict intensifies. Schnabel indicated that a more forceful monetary policy response would be needed only if there were clear signs of a strong and front-loaded tariff pass-through, a sharp deterioration in labour market conditions, or an unanchoring of inflation expectations. She cited the ECB’s Consumer Expectations Survey showing one-year-ahead inflation expectations rising to 2.9% in March from 2.4% in September 2024, while judging there were currently no indications that this increase is persistent or that expectations are at risk of unanchoring.
European Central Bank 2025-05-10
European Central Bank’s Schnabel sets out case for holding interest rates near neutral amid fiscal expansion and tariff risks
European Central Bank Executive Board member Isabel Schnabel, at the Hoover Monetary Policy Conference, advocated for keeping euro area policy rates neutral to manage post-pandemic inflation. She noted medium-term inflation pressures from fiscal expansion and protectionism, with a stronger monetary response needed only if tariff pass-through, labor market conditions, or inflation expectations worsen significantly. Current inflation expectations, according to the ECB’s Consumer Expectations Survey, have risen but are not persistently unanchored.