Isabel Schnabel of the ECB discusses inflation developments, energy shocks, policy responses, and economic risks in an interview conducted on 21 May 2026.
Isabel Schnabel, Member of the Executive Board of the European Central Bank (ECB), was interviewed by Balázs Korányi and Reinhard Becker on 21 May 2026. She provided an assessment of inflation developments since the last policy meeting.
Inflation has risen to 3% and is expected to increase further, towards 4% by the end of 2026. The shock is considered very large and persistent, driven by higher oil and gas prices than assumed in the March baseline scenario. The energy shock is unlikely to resolve quickly, and futures markets suggest oil prices will remain elevated over a significant period.
Schnabel highlighted that the persistence of energy prices could lead to broader inflation effects, with indicators such as firms’ selling price expectations, inflation expectations, and wages showing signs of spillover. She emphasized the importance of monitoring these indicators to assess inflation risks.
Regarding policy, she stated that given the size and persistence of the shock, looking through the inflation spike is no longer appropriate. A rate hike in June is considered necessary, with future decisions to be data-dependent and not pre-committed. The ECB’s baseline scenario in March included two rate hikes, and market expectations should not steer policy decisions.
Schnabel explained that headline inflation will be influenced by oil futures, which are currently in backwardation, leading to large base effects that will reduce inflation once high numbers drop out. She stressed that underlying inflation is more relevant for the outlook, with upside risks in non-energy industrial goods and global supply chain pressures.
She discussed the potential impact of the energy shock on economic growth, noting that weakening demand might offset some inflationary pressures, but risks remain due to supply disruptions and shortages. The ECB’s growth forecast of 0.9% for 2026 may be optimistic, as confidence indicators and PMI data point to a slowdown.
Schnabel also addressed the risks of shortages, supply chain disruptions, and the global impact of the war, which could increase downside risks to growth and upside risks to inflation. She noted that the German economy is being supported by fiscal expenditure, preventing a recession.
Regarding bond markets, she attributed rising yields mainly to increased inflation risk premia and emphasized the importance of ECB communication and fiscal policy sustainability. The Transmission Protection Instrument (TPI) remains a potential tool but is unlikely to be used unless necessary.
She clarified that market expectations do not influence ECB policy directly; rather, the ECB’s reaction function guides market perceptions. The ECB’s balance sheet normalization is ongoing, with excess liquidity decreasing, leading to greater demand for reserves and potential volatility in money market rates.
Schnabel highlighted that the ECB’s independence depends on fiscal discipline and financial stability. She noted limited concerns about sovereign debt levels and stressed the importance of sustainable fiscal policies. Regarding the ECB’s leadership, she indicated she is prepared to serve as ECB President if asked, but no discussions have been publicly clarified.
