Isabel Schnabel says overlapping shocks require the ECB to watch underlying inflation

European Central Bank Executive Board member Isabel Schnabel said in Luxembourg on September 30 that the ECB must judge how overlapping economic shocks affect euro-area inflation over the medium term. In a speech to the EC-EIB-ESM Capital Markets Seminar, she argued that an energy shock should not automatically be treated as temporary when other price pressures are still present. Her argument helps explain the ECB’s recent interest-rate increases and the data it will watch next.

Why Schnabel says an energy shock can warrant higher rates

Schnabel said the ECB has raised its key interest rates by 50 basis points since June, taking its deposit facility rate from 2% to 2.5%. She described those decisions as a response to a worsening inflation outlook after the start of the Middle East conflict, aimed at returning inflation to the ECB’s 2% target over the medium term. The September 10 decision accounted for a 25-basis-point increase, according to the ECB’s rate announcement.

Her central point was about the projected path of prices, rather than whether a shock begins on the supply or demand side of the economy. Higher interest rates cannot remove a supply disruption, she said. But if that disruption is large or persistent enough to push expected inflation above target, tighter policy can help contain the broader rise in prices. The shock’s nature also affects how gradually inflation should be brought back to target.

Schnabel said higher expected inflation can reduce real, or inflation-adjusted, borrowing costs and support demand even as a supply shock raises prices. Raising policy rates can counter that effect. She also argued that restraining demand may limit how far higher input costs spread into consumer prices. These are her explanations for the ECB’s policy approach, not evidence that every projected effect has already appeared in prices.

What makes the euro-area outlook more complicated

An ECB analysis published on September 1 provides an earlier measure of the energy shock. It estimated that euro-area headline inflation rose from 1.7% in January to 3.2% in May 2026 and attributed almost all of that 1.5-percentage-point increase to adverse energy supply shocks. Its observations ended on May 31, so the estimate describes the first part of the year, not inflation in September.

Why the ECB is looking beyond headline inflation

Schnabel said headline inflation forecasts can make an energy shock look short-lived because they incorporate assumptions drawn from energy futures prices and the arithmetic of year-on-year comparisons. The ECB therefore tests scenarios with different assumptions about the shock’s strength and duration. It also places greater weight on underlying inflation measures when assessing whether price increases are spreading beyond energy, she said.

The September projections she cited put average headline inflation at 3.0% in 2026 and 2.1% in 2028. Inflation excluding energy and food was projected to reach 2.6% in 2027 and remain at 2.3% in 2028. Those are forecasts, rather than measured future outcomes. Schnabel said oil and gas prices had moved closer to an adverse scenario after the projections’ cut-off date, adding uncertainty to the baseline.

She said ECB staff had raised their projected inflation excluding energy by a cumulative one percentage point compared with projections made before the conflict, mainly because of expected indirect effects from higher energy costs. Schnabel cited rising import and producer prices, particularly for intermediate and capital goods, as early evidence of costs passing through production chains. She said those increases were not yet visible in core inflation.

What changed since the ECB’s September rate decision

At the September 10 rate decision, ECB President Christine Lagarde said the Middle East conflict was generating inflation pressure and that future decisions would depend on incoming data. The Associated Press also reported the decision and those remarks. Schnabel’s September 30 speech added a fuller explanation of why the ECB considers several simultaneous shocks and underlying inflation when deciding whether the energy-driven rise in prices requires a policy response.

The speech is a new account of Schnabel’s policy reasoning since NewsJaws’ earlier coverage of her role at the ECB. Schnabel said policymakers must check whether the projected spread of energy costs into other prices occurs as expected, alongside changes in inflation expectations, demand and the effect of higher rates on the economy. The size and persistence of those effects remain uncertain; the speech did not announce another rate decision.