Isabel Schnabel, member of the Executive Board of the European Central Bank (ECB), outlined on September 30 at the 8th annual EC-EIB-ESM seminar how the ECB is responding to challenges posed by a succession of shocks affecting inflation in the eurozone.
After a period of post-pandemic inflation decline, new shocks, notably linked to the conflict in the Middle East, have increased inflationary pressures, impacting citizens’ daily lives.
To address this, the ECB has enhanced the transparency of its monetary framework in 2023 by specifying the criteria guiding its decisions: inflation outlook, associated risks, underlying inflation dynamics, and monetary policy transmission. This “framework guidance,” as termed by President Christine Lagarde, aims to strengthen public confidence in the ECB’s commitment to price stability.
Specifically, faced with the worsening inflation outlook since the start of the Middle East conflict, the Governing Council raised key interest rates by 50 basis points in June, increasing the deposit facility rate from 2% to 2.5%.
These decisions, well anticipated by markets, contribute to a smooth adjustment of financing conditions. The transparency of the framework helps limit excessive volatility by reducing uncertainty about the ECB’s reactions, while encouraging investors to analyze economic data independently.
Isabel Schnabel emphasized the importance of understanding how the nature of shocks influences monetary response, the challenges related to managing overlapping shocks, and the impact of inflation forecasts and incoming data on policy assessment.
