ECB's Schnabel: Greater Caution Is Needed in Adjusting Policy

Remarks of Officials

Summary:

Global market expectations for long-term interest rates have fundamentally shifted, and central banks need to adapt to the new inflationary environment and respond with appropriate policy responses.

Isabel Schnabel, Member of the Executive Board of the European Central Bank (ECB), spoke at the Bank of England Conference in London on February 25, 2025, as follows:

The global economic growth potential is undergoing a structural adjustment. In recent years, factors such as geopolitical fragmentation, climate change and labor shortages are having a profound impact on economic growth patterns. Whereas in the past the global economy suffered from a "savings glut", which led to low long-term interest rates, the current trend of widening fiscal deficits and central bank balance sheet normalization is driving a "bond glut", which in turn is raising long-term real interest rates. Current long-term real interest rates in the euro area are already much higher than in most of the period following the 2008 financial crisis, suggesting that growth may face new constraints and that the economic environment ahead will be different from that of the past decade.

High inflation risks remain, and the global economy has departed from the prolonged low-inflation environment of the past. The recent spike in inflation may have permanently altered consumer and business expectations, making it easier for businesses to pass on cost increases to consumers and thus exacerbating inflation stickiness. In addition, global supply chain adjustments, the trend towards de-globalization and uncertainty in energy markets could create long-term upward inflationary pressures.

Labor shortages coexist with structural changes. In recent years, the global balance between labor supply and demand has shifted, with some industries experiencing chronic labor shortages. Population ageing, changes in immigration policies and labor market adjustments brought about by technological change are likely to affect future job market conditions. In addition, the structural tightening of the labor market is still likely to exert long-term pressure on wages and the level of inflation, a trend that central banks will need to monitor closely.

Overall, the global economy is currently undergoing profound changes and central banks need to adapt to the new situation. The post-pandemic economic environment has been different from that of the past decade, and the rise in the level of long-term real interest rates is likely to be a persistent trend. Therefore, central banks need to be more cautious in adjusting their policies, keep a constant watch on the dynamics of the global market, and take appropriate measures when necessary to ensure the long-term stable development of the economy.

ECB's Schnabel

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ECB's Schnabel: Greater Caution Is Needed in Adjusting Policy

Risk Disclosure