In a speech titled “Is inflation still global in a more fragmented world?” at the 31st Dubrovnik Economic Conference, European Central Bank Executive Board member Isabel Schnabel set out analysis suggesting that inflation dynamics remain strongly interconnected across major economies, even as policy settings can diverge. The presentation highlighted the divergence in 2025 between the ECB’s deposit facility rate, shown at 2% effective 12 June 2025, and the effective Federal funds rate, shown at 4.33% as of 6 June 2025. Supporting charts pointed to historically strong co-movement in euro area and US interest rates and in headline and core inflation, with correlations weakening mainly around large idiosyncratic shocks. On fragmentation-related drivers, the presentation illustrated how a tariff conflict could dampen domestic inflation via weaker global demand, while global value chains can amplify tariff-induced cost-push shocks in inflation measures. It also flagged potential global inflationary effects from export restrictions on critical raw materials, suggested trade diversion from China to the European Union is unlikely to strengthen inflation divergence, and indicated that expected ECB–Federal Reserve interest rate decoupling in response to a tariff shock is limited based on forward curves.
European Central Bank 2025-06-07
European Central Bank's Schnabel presents analysis on persistent global inflation co-movement and limited rate decoupling amid fragmentation
European Central Bank Executive Board member Isabel Schnabel, at the Dubrovnik Economic Conference, analyzed inflation dynamics' interconnectedness across major economies despite differing policies. She noted the divergence between the ECB’s deposit facility rate at 2% and the Federal funds rate at 4.33% in June 2025. The presentation also discussed tariff conflicts, global value chains' impact on inflation, and limited ECB–Federal Reserve interest rate decoupling in response to tariff shocks.