Schnabel favors flexible rates and smaller central bank balance sheets
Isabel Schnabel urged the European Central Bank (ECB) to preserve policy flexibility, respond to the inflation outlook and protect monetary dominance. At the ECB Conference on Money Markets in Frankfurt, she advocated a balance sheet no larger than necessary.
Flexibility against overlapping shocks
Executive Board member Schnabel said pandemic forward guidance constrained adjustment and favored policy rates over less reversible asset purchases.
Supply shocks require action when persistent inflation threatens expectations.
Services inflation exceeded 3 percent before the Middle East conflict; medium- to longer-term consumer expectations have since moved away from 2 percent.
She opposed bank deregulation and urged stronger non-bank oversight and prudent budgets.
Non-bank assets now rival banks' assets; euro area public debt has risen nearly 20 percentage points of GDP since the early 2000s.
International Monetary Fund projections put US debt at 145 percent of GDP in 2031, versus 124 percent in 2025, and China's at 122 percent, versus 99 percent.
Banks determine the liquidity margin
Schnabel said asset purchase programme and pandemic emergency purchase programme portfolios can run down to zero unless the effective lower bound requires renewed purchases.
Banks can request liquidity weekly at fixed rates against broad collateral.
Persistent demand would justify structural longer-term refinancing operations first, then a securities portfolio as legacy holdings decline.
Standard operations would supply marginal liquidity.
She cited past distortions exceeding 50 basis points above the deposit facility rate in specialised repo transactions.
Scale supports monetary autonomy
Schnabel linked fiscal resilience to growth across a market of more than 450 million Europeans.
She cited internal barriers equivalent to tariffs of 96 percent for services and 67 percent for goods.
Her case for a 28th corporate regime, the digital euro and tokenisation puts integration alongside regulation in protecting monetary autonomy.