Schnabel advocates price stability amid supply shocks and AI challenges
ECB Executive Board member Isabel Schnabel argued that central banks must maintain a credible commitment to price stability, even as calls for dual mandates intensify. Speaking at the 2026 US Monetary Policy Forum, she highlighted the challenges posed by frequent supply-side shocks and the potential of artificial intelligence.
Price stability: The overriding task
Isabel Schnabel asserted that the practical distinction between single and dual central bank mandates is often minimal, as stabilising both inflation and employment frequently necessitates identical policy responses.
This 'divine coincidence' is evident in demand-driven fluctuations, where monetary policy adjustments address both inflation and unemployment.
The historical lesson from the 1960s and 1970s, where prioritising growth led to severe stagflation and eroded public trust, underscores the importance of price stability.
This experience established the framework of independent central banks focused on anchoring inflation expectations.
Schnabel highlighted that even central banks with a single mandate consider employment outcomes, aiming to achieve price stability while minimising output and labour market volatility.
For dual mandates, inflation acts as a critical constraint, limiting employment support when price stability is compromised.
Supply shocks reshape policy landscape
The pandemic unveiled critical limitations, demonstrating that monetary policy becomes more complex with frequent supply shocks.
Policymakers previously believed the Phillips curve was flat, making inflation unresponsive to tight labour markets.
However, the pandemic showed a steepening and upward shift of the curve, driven by supply bottlenecks, energy shocks, and altered price-setting behaviour.
Schnabel warned that the global economy faces more frequent supply-side disturbances, citing the recent conflict in Iran affecting energy markets.
In this volatile environment, managing inflation requires a credible commitment to the target, rather than fine-tuning unemployment along a stable Phillips curve.
Policy must operate under significant uncertainty, making judgment and credibility central assets.
Beyond the divine coincidence
Running the economy 'hot' with tight labour markets amplifies second-round effects from supply shocks, making inflation significantly harder to control.
Furthermore, expansionary demand policies yield diminishing returns for employment once an economy is operating near its potential and faces supply constraints.
This underscores that while supporting employment is a valid goal, it must remain firmly secondary to price stability to ensure sustainable economic health.