Interview with Reuters

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Balázs Korányi and Reinhard Becker on 21 May 2026

26 May 2026

Please give us your assessment of inflation developments since your last policy meeting.

Inflation has already risen to 3% and according to market expectations, it’s going to rise further, towards 4% at the end of the year.

What matters for monetary policy is the size and persistence of the shock. By historical standards, this shock is very large.

Oil prices stand above the levels we assumed in the March baseline scenario, and both oil and gas prices are much higher than they were before the war.

Our hope that this conflict would be resolved quickly has not materialised. The shock is much more persistent. In terms of persistence, we have actually moved beyond the adverse scenario, which assumed a rapid normalisation of oil prices.

The futures curve suggests that oil prices are expected to remain elevated over a significant period of time.

When you say we moved beyond the adverse scenario, you mean in terms of the persistence, not the prices?

Not today’s prices. Prices are currently between the baseline and the adverse. But if you look at developments over longer horizons, you’ll see that the current oil futures curve stands above the adverse scenario.

The main question is whether this energy price shock is going to feed into broader inflation developments and to what extent there will be indirect and second-round effects.

We are seeing increasing signs that the shock is spilling over to other parts of the consumption basket. We are looking at a number of indicators. One key indicator is firms’ selling price expectations. According to the European Commission survey, there is a sharp increase across sectors in the share of firms planning to raise their selling prices over the coming three months, faster than in 2022. This is also confirmed by the rise in output prices in the Purchasing Managers’ Indices (PMIs).

A second important indicator is inflation expectations. All surveys and market indicators are showing that short-term inflation expectations have gone up sharply.

What is more worrisome is that in our Consumer Expectations Survey, inflation expectations have also increased over the medium term and there has been a shift in the distribution of inflation expectations to the right. So, there has been a bit of a fattening of the right tail of the distribution. This has often been interpreted as an early indicator that the risk of a de-anchoring of inflation expectations is increasing. This must be monitored very carefully.

The third important indicator is wages. This is more complicated because we have staggered wage negotiations and long durations of wage agreements. Therefore, hard data on wages become available only with significant lags. So, if we wait for second-round effects to appear in hard data on wages, we will certainly be too late.

We have some forward-looking indicators, like the wage tracker and surveys. In surveys, we see a slight upward revision in wage growth, but I think it’s too early to make a judgement on that. So, this is something we need to look at.

What does all this mean for policy?

We are facing an adverse supply shock, and this always poses a dilemma for central banks because there may be a need for monetary policy tightening, but at the same time, this exacerbates the negative impact of the shock on the economy.

Given the size and the persistence of the current shock, looking through is no longer an option in my view.

The shock is working its way through the economy and is shifting inflation away from our target over a significant period of time.

Even if the war ended today, a lot of damage has already been done to energy infrastructure and global supply chains. So, even then, I believe that a monetary policy reaction would be needed.

What do you mean by “significant” period of time?

Over the relevant horizon for monetary policy.

Does this mean that a move already in June is appropriate?

From today’s perspective, I think a rate hike in June will be needed.

Does a single rate hike make sense, or would that mean more is coming later?

We will remain strictly data dependent. That means that at every upcoming meeting, we are going to reassess the data and analyse whether another rate hike is appropriate. We do not pre-commit to any particular rate path.

Let me put this differently: are the size and the persistence of the shock aligned with market expectations for three rate hikes? Is the market pricing appropriate?

What I can say is that the baseline scenario that we had in March incorporated market expectations of two rate hikes.

So markets don’t get ahead of themselves?

We never comment explicitly on market expectations. It’s us who steer the market. It’s not the market steering us.

I think it’s important that our reaction function is well understood by markets.

Both the baseline and adverse scenarios see inflation back at, then below, target next year. So why would you not look through this spike, given that monetary policy works with long lags?

After an energy price shock, it is misleading to look at headline inflation alone.

The future projected path of headline inflation depends heavily on the shape of the oil futures curve, which is currently strongly in backwardation. This creates large negative base effects, which will push inflation down once the very high inflation numbers drop out of the annual calculation.

What really matters for our inflation outlook is underlying inflation. I see significant upside risks to inflation of non-energy industrial goods relative to our March projections.

Owing to the global nature of the shock, there are increasing pipeline pressures worldwide, as reflected in strongly rising producer prices. I expect these higher costs to trickle through global supply chains, eventually showing up in higher goods prices. Before the war goods inflation was very low, in part due to low import price inflation of intermediate and final goods, especially from China.

Higher energy prices lower economic growth and thus become disinflationary over a longer period. Would this not be a reason to look through this shock?

The key question for monetary policy is whether the weakening of aggregate demand is, by itself, strong enough to bring inflation back to target over the medium term. In other words, will the weakening of aggregate demand force firms to absorb the higher costs in their profit margins? And will it force workers to absorb the loss in purchasing power?

That is what we need to monitor. The policy reaction will depend very much on the extent to which the higher costs are being passed through to prices. And this again will depend on the resilience of the economy.

The European Commission expects 0.9% growth this year, in line with your baseline. Given the flow of bad news, is this perhaps too optimistic?

Given the high persistence of the shock, I believe that the negative impact on economic growth will also be stronger. And this is also what is suggested by incoming data.

We have seen a sharp decline in confidence indicators, especially among consumers. Consumption growth may turn out to be weaker than we projected in March, even if past savings constitute a certain buffer.

The latest PMI data were also not good. The data show a significant slowdown in services, which matter a lot for the euro area economy. Manufacturing is still expanding, which could partly be due to stockpiling, also in anticipation of shortages and higher prices.

I’m rather optimistic about investment because the current shock has made investments in the green and digital transitions, and also in defence, even more urgent.

Firms and governments cannot afford to wait just because of higher uncertainty, as they risk falling behind.

This is also why the global AI boom continues. Everybody is trying to make sure that they’re not falling behind. We’ve always considered the AI boom to be a positive supply shock, but for now it’s actually playing out as a strong positive global demand shock. And this is keeping global growth up.

So we need to see whether the euro area economy will again prove resilient. It has happened several times before, and we will see whether this is going to be the case again this time.

Is there a risk that actual shortages of products, like jet fuel or fertiliser, could reduce growth, perhaps with non-linear effects?

The longer the war lasts, the higher the likelihood of physical shortages. There have been shortages of refined products, fertilisers and petrochemicals in some parts of the world, especially in Asia and Africa. Europe has been spared so far, and even the concern about the shortage of jet fuel seems to have been mitigated.

But oil inventories are being run down at a record pace, as stressed by the International Energy Agency, because the world is consuming more oil than it is producing. This is why future shortages cannot be excluded.

More generally, we are seeing increasing signs of disruptions to global supply chains. There has been a sharp increase in delivery times in the PMIs. The New York Fed’s indicator on global supply chain pressures is standing at the highest level since 2022 and there has also been an increase in freight costs.

All of these imply downside risks to economic growth and upside risks to inflation.

When you say downside risks to growth and upside to inflation, are you implying that these risks have increased compared to your April assessment?

In the last Governing Council meeting we already said risks had increased, and I think the longer the war lasts, the more these risks increase.

When we talk about risks in the monetary policy statement, we always mean relative to staff projections.

Germany was expected to turn a corner this year. Do you think the oil shock could derail that?

There was an expectation that the German economy would turn the corner, but it, too, has been hit hard by the oil price shock. What is keeping growth up in Germany is mainly fiscal expenditure.

The fiscal package will make a positive contribution, likely preventing the country from sliding into a recession.

What is the root cause of the recent bond market sell-off?

The increase in bond yields in the euro area is mainly driven by an increase in inflation compensation. And this partly reflects an increase in inflation risk premia owing to heightened uncertainty about the future inflation outlook. If you look at ten-year real rates, they have been pretty stable over the past few years.

The best that a central bank can do in such a situation is to convey the very clear message that we are going to do whatever is needed to bring inflation back to target over the medium term, and then to act accordingly, because this is what can help reduce the inflation risk premium.

Governments will also have to do their part by bringing fiscal policy onto a sustainable path. In the current situation, this means fiscal policy should observe the famous “three Ts”, meaning fiscal support should be temporary, targeted and tailored.

All in all, I don’t see any concerning developments in euro area sovereign bond markets.

Does this mean the rise in yields is warranted given higher inflation?

It’s mainly a reflection of inflationary developments.

Could you see the Transmission Protection Instrument (TPI) being needed in the next couple of years?

The TPI has certain eligibility criteria and can only be used if these eligibility criteria are fulfilled. I hope that the tool is not going to be used, but if necessary, of course, it’s going to be used.

But I don’t expect the tool to be needed. And that’s also in line with expectations in the ECB’s Survey of Monetary Analysts. The probability that it’s going to be used is seen as pretty small.

Given the increase in long-end yields, is the market doing some of your work in tightening financing conditions?

I don’t like that formulation. Markets reflect expectations about our policy, but they cannot do our job. If we judge that these expectations are appropriate, then eventually we will have to act. Otherwise there will be a disconnect between our actual reaction function and what markets believe our reaction function is.

We currently see that long-term inflation expectations are well anchored. Our credibility as inflation fighters is not in question. But this anchoring is conditional on us responding to an inflation surge in a proper way.

Are ballooning national debt levels a threat to your independence? Could high debt limit your room for manoeuvre?

This is why I gave a speech recently emphasising that our independence does not just depend on what is written in the Treaty, but also on what is happening in the economy.

I singled out two aspects that I find particularly important: fiscal policy and financial regulation.

It’s up to governments to ensure that fiscal policy remains on a sustainable track. There’s nothing we can do about that. It is also up to governments, and regulators more specifically, to make sure that the financial sector is safe and sound. If that’s not the case, it will also have direct implications for central banks and may constrain the space in which we are acting.

When it comes to fiscal support during the current shock, have you seen anything out there that is worrisome?

No, I think fiscal constraints are becoming binding, in the sense that there is relatively little space to embark on big fiscal support packages.

I’m not particularly concerned because measures have so far been very limited.

What do you make of incoming Fed Chair Kevin Warsh’s comments that the Fed doesn’t have the same level of independence in international finance as in monetary policy?

We will see how Kevin Warsh is going to act as the new Chair of the Fed. Overall, I don’t think we’re going to see fundamental changes in the way the Fed behaves. And the new Chair is certainly going to respect the mandate of the Fed as well.

How far do you think we are from the point where the ECB’s balance sheet stops shrinking and naturally starts to level off?

The beauty of our operational framework is that we don’t need to know.

The way the framework works is very different from supply-driven frameworks, where the central bank actively steers excess liquidity to control short-term interest rates.

At the moment excess liquidity is ample. That explains why banks’ access to our operations has been limited. Money market rates stand below the rates that we offer on our operations, so it’s simply not economical for banks to access our operations.

That’s going to change as the normalisation of our balance sheet proceeds. Excess liquidity is going to become less ample. And then we will come to the transition, when banks are going to start accessing our operations and this will endogenously lead to changes in excess liquidity. Eventually we will get to the point where the balance sheet is going to durably grow again.

How do we know liquidity is “less ample”? Will there be greater volatility in the €STR? Rising take-up of main refinancing operations (MROs)?

“Less ample” will show up in the form of greater access to our operations. This is a clear signal that banks have a demand for reserves that they cannot satisfy in the market at more favourable rates. Therefore they will start accessing our operations.

In this transition, I wouldn’t exclude a bit more volatility in money market rates. We’ve also seen this in the United States and the United Kingdom. I don’t think that’s something to be overly worried about. It’s the normal transition that we are expecting. And rates will have to move up to make this happen.

Is this for next year or already this year?

I think it’s unlikely it will happen this year.

There is a lot of uncertainty about the demand for reserves by banks. In a speech last year, I showed a simulation by ECB staff that gave a fairly wide range of estimates between €600 billion and €2.2 trillion.

A survey we conducted among bank treasurers confirms that there will be significant demand for reserves. How much exactly, we don’t know. But our framework is fully operational to deal with the transition once it happens.

How much demand can be satisfied by the MROs, how much by longer-term refinancing operations, and when could the structural bond portfolio kick in?

The design of the structural operations has not yet been defined, and we will start looking into that later this year. All the parameters you mention will need to be discussed.

The first thing that needs to happen is that banks access the standard refinancing operations, because they are our marginal tool for providing liquidity.

Over time this will lead to durable growth of the balance sheet. But we will not want to roll over huge amounts of liquidity every week. Therefore, at some point, we will shift part of banks’ structural reserve demand into structural operations. When and how this happens still needs to be defined. At that point, we will still be holding very large amounts of bonds from our previous monetary policy operations. And that’s why we will first start with structural longer-term refinancing operations. And then we will have to decide on the share of the structural operations that is going to be provided through longer-term refinancing operations and through bond purchases.

At some point, the monetary policy portfolios will have run off to a sufficient degree so that we can start building the structural bond portfolio. But that is still relatively far in the future.

Are you a potential candidate to become ECB President?

I can only repeat what I have said before: if I was asked, I would stand ready.

Are you having conversations with decision-makers on this? Have you clarified whether you’re legally eligible?

That’s all I will say on this topic.