Schnabel emphasizes price stability in era of supply shocks and AI
Isabel Schnabel, Member of the Executive Board of the European Central Bank, argued at the 2026 US Monetary Policy Forum that central banks must prioritize price stability amid frequent supply shocks and the rise of artificial intelligence. She stated that a dual mandate rarely leads to fundamentally different policy prescriptions, as inflation processes impose similar constraints on all central banks.
Mandates converge on price stability
Isabel Schnabel argued that the distinction between single and dual mandates is often inconsequential in practice, as stabilising inflation and employment frequently lead to the same policy response.
For demand-driven fluctuations, this is self-evident: weakening demand lowers inflation and raises unemployment, prompting monetary easing under both mandates.
This phenomenon, known as the 'divine coincidence', suggests that monetary policy can stabilise both inflation and employment simultaneously during typical business cycles.
The pandemic provided a recent illustration, with central banks globally responding with comparable vigour to surging inflation, even if it meant tolerating higher unemployment.
Schnabel explained that once excess savings, rising energy prices, and disrupted supply chains began to feed into inflation expectations, restoring price stability became the overriding task.
Even a central bank with a single mandate, like the ECB, is not indifferent to employment outcomes, but ensures price stability in a manner that minimises avoidable volatility in output and labour markets, with price stability remaining the primary objective.
Supply shocks reshape policy landscape
The pandemic revealed that monetary policy becomes more challenging when supply shocks are prevalent, leading to a steepening and upward shift of the Phillips curve.
Schnabel warned that the global economy is likely to face more frequent supply-side disturbances, from energy price spikes to trade fragmentation, making a credible commitment to the inflation target paramount.
She also highlighted that running the economy 'hot' can fuel second-round effects, where tight labour markets empower workers to demand higher wages and firms pass on increased costs, potentially leading to a wage-price spiral.
Moreover, expansionary demand policies become less effective in stimulating employment once the economy operates close to its potential, as the euro area has transitioned to a supply-constrained regime where labour force growth, partly from foreign workers, plays a larger role than demand stimulus.
Credibility is the core asset
Schnabel's speech reinforces the ECB's unwavering commitment to price stability, framing it as a universal central bank imperative regardless of formal mandate.
It subtly pushes back against calls for a dual mandate by arguing that economic realities, particularly persistent supply shocks, necessitate a primary focus on inflation control.
This underscores the institution's cautious stance on easing policy too quickly, prioritizing long-term credibility over short-term growth considerations.