By David Barwick – NEW YORK (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Friday said euro area monetary policy remained “in a good place” but warned that policymakers “cannot be complacent,” with the recent energy shock, tight labor markets and firming demand still posing upside risks to inflation over the medium term.
Speaking at the 2026 US Monetary Policy Forum, Schnabel argued that policy should stay focused on the medium-term inflation outlook rather than short-term fluctuations in activity or temporary moves in headline inflation.
“What matters for monetary policy is the medium-term outlook – that is, whether underlying price dynamics and wage developments are consistent with the target over the policy-relevant horizon,” she said, adding that “the recent spike in energy prices following the tensions in Iran makes the inflation path more uncertain.”
She nevertheless indicated that not every near-term inflation move should trigger a policy response, saying temporary and limited deviations from target were of “limited relevance for policy decisions” as long as inflation expectations remained well anchored.
At the same time, Schnabel made clear that the Governing Council had reason to stay cautious, pointing to still-tight labor markets, unemployment below estimates of the natural rate and continued hiring difficulties across sectors.
“This constellation of factors poses upside risks to the future trajectory of domestic inflation, particularly in labor-intensive services where wages account for a large share of total costs and the pass-through tends to be gradual but persistent,” she said.
She also pointed to increasingly expansionary fiscal policy and stronger industrial momentum, saying governments were underpinning aggregate demand while new orders and output expectations in manufacturing had risen markedly.
“The upshot is that, with tight labor markets and strengthening domestic demand, price pressures could re-emerge if demand outpaces supply,” she said.
A central theme of Schnabel’s speech was that recent experience had strengthened the case for a firm focus on price stability even amid calls for central banks to give greater weight to employment. In practice, she said, the difference between single and dual mandates was often limited because persistent inflation ultimately constrained how far policymakers could support jobs.
Drawing on the pandemic episode, Schnabel argued that once supply shocks started feeding into inflation expectations and second-round effects, central banks had little choice but to prioritize restoring price stability.
“In this volatile world, the lessons from the pandemic suggest that central banks should resist the temptation to fine-tune the economy, accommodate fiscal policy or deliberately run the economy hot in pursuit of marginal short-term gains,” she said.
On artificial intelligence, Schnabel said new technologies could over time ease supply-side constraints, lift productivity and raise the equilibrium real interest rate, which would make an unchanged policy rate effectively more accommodative. But she stressed that such effects could not yet be assumed in real time.
“A prudent approach, therefore, is to let the data guide policy rather than relying on a still speculative narrative,” she said, warning that AI could prove inflationary in the short run through energy-intensive investment, chip bottlenecks and shortages of skilled labor.
Summing up the current stance, Schnabel said “monetary policy remains in a good place,” but added that “[w]e need to be vigilant as the current geopolitical and macroeconomic environment creates upside risks to inflation over the policy-relevant horizon.”
