European Central Bank Executive Board member Isabel Schnabel said rising public debt and leveraged investors could make it harder for the ECB to maintain price stability when markets come under stress.
Schnabel spoke Thursday, Nov. 5, at the ECB Conference on Money Markets 2026 in Frankfurt. She described her remarks as personal reflections rather than a new policy decision. “We should expect the unexpected,” she said.
Schnabel said the pandemic marked a break from the low-inflation conditions that had shaped earlier policy thinking. She cautioned that commitments built around one economic environment could limit central banks’ ability to respond when circumstances change. Policymakers, she said, should assess a shock by how it alters the projected inflation path.
A supply disruption that lasts can affect prices beyond the goods directly involved through indirect price effects, wage dynamics and inflation expectations, Schnabel said. She added that longer-range consumer inflation expectations had risen and moved gradually away from the ECB’s 2% target after the latest energy shock.
The ECB’s Governing Council left its three key interest rates unchanged on Oct. 29. It cited higher energy prices as a risk of faster inflation and weaker growth, and said rate decisions would remain data-dependent and made meeting by meeting.
Schnabel warned that falling collateral values, higher margin requirements or reduced access to funding could force leveraged investors to unwind positions or sell sovereign bonds, adding pressure to markets. Nonbank financial intermediaries now hold financial assets on a scale comparable to banks, she said, while euro area public debt relative to GDP has risen by nearly 20 percentage points since the early 2000s. She cited the 2020 “dash for cash” and the U.K.’s 2022 liability-driven investment crisis as examples of market stress.
She linked the growth of nonbank finance partly to tighter bank regulation and said geopolitical fragmentation and climate change were contributing to more persistent supply shocks. Large asset purchases, she said, can displace private market activity, distort prices and expose central banks and taxpayers to financial risks. The ECB is winding down its asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) portfolios. Schnabel said they could eventually fall to zero unless the ECB again faced the effective lower bound, when renewed purchases might be needed to protect price stability.
For banks’ liquidity needs, she backed weekly ECB refinancing at a fixed rate against broad collateral. If requested amounts for standard refinancing continue to rise and remain elevated, Schnabel said, that would indicate lasting liquidity needs and could support structural operations, including longer-term refinancing.
