European Central Bank board member Isabel Schnabel said monetary policymakers could not wait for indirect and second-round effects from energy shocks to materialise. If policymakers waited for firms to visibly raise prices and wage negotiations to conclude, they would be acting too late, she said. Oil and gas prices had moved closer to the adverse scenario used in the ECB’s latest projections, she said.
The ECB has raised rates by 50 basis points since June, lifting the deposit facility rate from 2% to 2.5%. Schnabel’s speech linked that tightening to the need to protect medium-term price stability. It also distinguished the initial energy shock from the broader wage, price and expectation effects that can follow. She said central banks must form a judgement about the transmission of shocks to underlying inflation and calibrate policy accordingly.
ENERGY PRICES CHALLENGE THE BASELINE OUTLOOK
The ECB’s September projections put headline inflation at 3.0% in 2026 and 2.1% in 2028. Core inflation was projected at 2.6% in 2027 and 2.3% in 2028. Schnabel said oil and gas prices had moved closer to the adverse scenario since the projections' cut-off date, implying a larger and more persistent deviation of inflation from the 2% target.
Higher interest rates will not remove supply disruptions or reopen the Strait of Hormuz, Schnabel said, but the nature of a shock determines how quickly inflation should return to target, not whether to respond at all. What matters for monetary policy, she said, is how energy prices translate into underlying price pressures.
THE GOVERNING COUNCIL FACES AN OCTOBER DECISION
She said the projections' assumptions must be checked against incoming data, highlighting inflation expectations, the resilience of aggregate demand and the impact of higher market interest rates.
The ECB’s next scheduled policy decision is on 29 October. The coming months will show how far pipeline price pressures feed through to underlying inflation and expectations, she said.