Schnabel's four lessons: avoid commitments, watch the inflation outlook, guard dominance
Serguey Asael Shinder2 min readECB Executive Board member Isabel Schnabel spoke at the ECB Conference on Money Markets in Frankfurt on 5 November, presenting what she called personal reflections as she reaches the end of her term. She described seven years that took the ECB from persistently low inflation to recurrent inflation shocks, and from accommodative policy to the fastest tightening cycle in its history.
Her first lesson is to preserve room for manoeuvre. Before the pandemic the ECB had chronically overpredicted inflation; afterwards it repeatedly underpredicted it and was slow to see that the regime had changed. Two features were underweighted in the models: a steeper Phillips curve, as firms changed prices more often, and the role of rising unit profits, unlike the 1970s, when unit labour costs drove inflation. She also argued that the old savings glut has become a bond glut, which pushes up the neutral rate. In her words, forward guidance during the pandemic was too Odyssean, and an instrument that is hard to reverse, such as large asset purchases, is itself a form of commitment; the key policy rates should remain the main tool, with market-stabilising tools such as the Transmission Protection Instrument kept separate.
The other three lessons follow. Policy should respond to how a shock affects the inflation outlook rather than to its nature. The ECB's mandate depends on fiscal and regulatory frameworks that secure monetary dominance, which allowed it to tighten forcefully despite recession and stability risks. And policy should be implemented with a balance sheet no larger than necessary, which reduces side effects, preserves room for future action and keeps money markets active.
What it means
Coming from one of the architects of the tightening, the critique of forward guidance and large balance sheets reads as guidance for the next cycle. The emphasis on keeping instruments reversible is a signal that the ECB wants fewer promises and more meeting-by-meeting freedom.