Schnabel: supply shocks set the pace of tightening, not whether to tighten
Victoria Shinder2 min readIsabel Schnabel, a member of the ECB's Executive Board, used a speech on 30 September to push back against the idea that central banks should simply look through supply shocks. Since June the Governing Council has raised its key rates by 50 basis points, taking the deposit facility rate from 2% to 2.5%.
Her argument is that the type of shock decides the speed of the response, not whether there is one. Higher rates cannot reopen the Strait of Hormuz, she said, but in the standard models what matters is the projected path of inflation. If a supply shock is large or persistent enough to push that path above target, the right response is to tighten, while allowing inflation to return more gradually than after a demand shock. She noted that household inflation expectations rose after the Middle East conflict began, pushing real bank lending rates down until policy moved.
She also described the shock as one of several. The energy shock hit while services inflation was still above 3% and unit labour costs were rising faster than their historical average. At the same time, the AI investment boom, the trade disruption from the 2025 tariffs and higher defence spending, including Germany's fiscal package, are pushing demand in different directions.
On forecasting, she warned that energy futures in backwardation make energy shocks look short-lived in projections. The ECB therefore relies more on scenarios and on measures of underlying inflation. The September staff projections see headline inflation falling from 3.0% this year to 2.1% in 2028, but inflation excluding energy and food rising to 2.6% in 2027 before easing to 2.3% in 2028. Since the cut-off date, she said, oil and gas prices have moved closer to the adverse scenario.
Her conclusion: central banks cannot wait for firms to raise prices and for wage deals to close, because by then they would be acting too late. The coming months will show whether the expected pass-through materialises.
Why it matters
Schnabel is setting out the case for the hikes already made rather than promising more. Her emphasis on the adverse scenario and on core inflation above 2% through 2028 leaves the door open to further tightening if energy prices stay high.