What next for the ECB: Schnabel’s sequencing logic

Do profit and loss considerations constrain Eurozone monetary policy?

  • ECB Executive Board member Isabel Schnabel’s speech this week on monetary policy and inequality offered a glimpse of on-going internal debates;

  • Schnabel argues for the current sequencing of exceptional policy withdrawal by claiming that early rate increases will impact taxpayers through losses on central bank balance sheets;

  • This underlines, as we have argued before, that central banks are genuinely concerned about profit and loss—an unspoken constraint on policy setting;

  • It’s a pity this was not explicitly addressed in the Strategy Review.

Since her appointment, Isabel Schnabel has been perhaps the most interesting member of the Executive Board to follow. She has graciously and patiently challenged critics and explained the logic of the ECB’s policy stance within Germany and beyond. Indeed, she was even dispatched to Karlsruhe to explain ECB policy only months before the Constitutional Court threw a “proportionality” grenade back at Frankfurt.

In other words: Schnabel’s speeches repay careful reading.

And on Tuesday this week she gave a speech on “Monetary policy and inequality” offering a glimpse into the considerations feeding the on-going internal debate as to how ECB policy should unfold from here.

The speech overall might be characterised as cautiously dovish.

Schnabel underlined the importance of continued policy activism while signalling vigilance about inflation prospects. To wit, the final sentence notes: “The ECB therefore continues to carefully monitor inflationary developments in the euro area.”

But of particular interest was the reference to the sequencing of the withdrawal of unconventional policy measures supporting the Eurosystem—and what it does and doesn’t reveal about the constraints on Eurosystem policy.

Draghi lives

This post is for paid subscribers