European Central Bank's Schnabel warns fiscal and financial dominance are eroding central bank independence

In a speech at the Charles Goodhart Lecture, European Central Bank Executive Board member Isabel Schnabel warned that central bank independence is under pressure not only from direct political attacks but also from two structural forces: rising public debt that can create fiscal dominance and renewed deregulation that can create financial dominance. She argued that the post-pandemic tightening cycle showed central banks can still prioritise price stability, but preserving that capacity will require credible fiscal frameworks, resilient prudential rules and central banks remaining within their mandates. Schnabel said higher debt, ageing-related spending, defence outlays and green and digital investment needs, together with shorter debt maturities and a larger role for price-sensitive investors in sovereign bond markets, could make future rate increases harder if they threaten fiscal sustainability. She warned that weakening post-2008 capital and liquidity safeguards would recreate fragility that constrains monetary policy, while risks are also migrating to less regulated sectors including non-bank financial intermediaries, private credit and stablecoins. She pointed to the ECB's 2022 Transmission Protection Instrument as helping contain disorderly fragmentation without compromising the policy stance, said the bar for asset purchases used as stimulus should be higher and more targeted, and argued that climate-related central bank action remains within mandate when it affects inflation or financial stability.