Schnabel defends rate increases to 2.5 percent amid energy shocks
European Central Bank Executive Board Member Isabel Schnabel defended recent policy tightening, noting that the central bank lifted its deposit facility rate by 50 basis points to 2.5 percent to prevent persistent energy and demand shocks from feeding into underlying inflation.
Why supply shocks demand higher rates
Speaking in Luxembourg, Schnabel rejected the view that monetary policy should look through supply disturbances.
When an adverse shock shifts the medium-term inflation path above target, tightening prevents lower real interest rates from adding to price pressures.
The ECB lifted the deposit facility rate by 50 basis points from 2.0 percent to 2.5 percent following two increases since June.
September staff projections foresee inflation dropping from 3.0 percent in 2026 to 2.1 percent in 2028, with core inflation projected at 2.6 percent in 2027 and 2.3 percent in 2028.
Staff revised projected core inflation upward by a cumulative one percentage point.
A collision of multiple shocks
The energy shock hit an economy with residual domestic pressures, where services inflation exceeded 3 percent and unit labour costs remained elevated.
Schnabel highlighted that multiple forces are interacting simultaneously: the rapid expansion of artificial intelligence is lifting investment and semiconductor prices, while trade tariffs and higher defence spending support demand.
These pressures are visible in intermediate and capital goods import prices.
The end of looking through
Schnabel delivers a robust theoretical defense of recent tightening, but placing heavy weight on core inflation projections risks overreacting to volatile cost-push dynamics.
If higher natural rates and AI investments prove durable, the ECB cannot return to easy policy.
Policymakers have closed the door to looking through supply disruptions.