Isabel Schnabel: The quiet erosion of central bank independence

SPEECHThe quiet erosion of central bank independenceSpeech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Fifth Annual Charles Goodhart LectureLondon, 7 May 2026Central bank independence is at risk. That was the key message conveyed by Jerome Powell at his final press conference, explicitly referring to the “legal attacks” on the Federal Reserve.[1] That a sitting Fed Chair felt compelled to make such a statement publicly says something about the times we are in.Political attacks on central bank independence are deeply disconcerting.[2] They risk doing lasting damage by sowing doubt about the institution's ability to act free of political consideration, weakening the anchor underpinning long-term inflation expectations.What makes the current moment particularly concerning is that direct political pressure is not arriving in isolation. It comes on top of structural forces that are quietly eroding the conditions under which independent monetary policy is effective. Two of these forces will be the focus of my remarks this evening.The first is the sustained increase in government debt to levels that risk creating a tension between price stability and fiscal sustainability, giving rise to fiscal dominance.[3]The second is the renewed momentum towards financial deregulation, which by reducing the resilience of the financial system can create the conditions for financial dominance – the implicit need to prioritise financial stability over price stability.I will argue that preserving central bank independence rests not only on sound legal foundations, but also on robust fiscal and regulatory frameworks that secure both debt sustainability and financial stability, as well as on a clear commitment by central banks to operate within the boundaries of their mandate.Pre-pandemic disinflation eased pressure on central bank independenceThe broad acknowledgement of the importance of central bank independence for economic stability has been one of the most significant shifts in economic governance over the past four decades. By the turn of the millennium, independence had become the norm in advanced economies and was spreading rapidly through the emerging world.[4]Its intellectual foundations were forged in response to the Great Inflation of the 1970s, which exposed the time inconsistency problem of monetary policy: even well-intentioned policymakers are tempted to exploit short-term trade-offs, leaving the economy with higher inflation and no lasting output gains.[5]The solution was institutional: monetary policy was to be de-politicised and delegated to an independent authority – one that is deliberately more inflation-averse, or “conservative”, than society at large – and it should be guided by a clear, legally protected price stability mandate.[6]The legal implementation and practical application of this solution was far from uniform, as differences emerged across countries regarding the design and extent of central bank autonomy.In this landscape, the ECB stands out as one of the most independent central banks in the world. Its autonomy is uniquely fortified by an international treaty, and its institutional strength is bolstered by a political culture that recognises the importance of central bank credibility for economic stability.The following decades vindicated this institutional solution in the euro area and beyond.[7] Central bank independence helped anchor inflation expectations. Inflation fell and stayed low across advanced economies (Slide 2, left-hand side). At the same time, output and inflation volatility declined in what became known as the Great Moderation (Slide 2, right-hand side).The improvement in outcomes, however, was not down to better monetary institutions alone.[8] From a price stability perspective, macroeconomic conditions in the period from 1990 to 2019 markedly diverged from those that had prevailed before.From the 1990s onwards, rapid globalisation, and the growing role of China in particular, expanded the global supply of labour and goods and intensified import competition, generating persistent disinflation.[9] In their attempt to control inflation, central banks were largely pushing on an open door.Maintaining price stability in such an environment did not test institutional resolve in the way envisaged in the 1970s and 1980s. The challenge of the 2010s was the opposite: to lift rather than restrain inflation.That task also required resolve, but of a different kind, namely the willingness to deploy unconventional and often controversial instruments – such as large-scale asset purchases – to defend price stability from below.Persistent disinflation also mitigated the tension between price stability and fiscal sustainability, as historically low interest rates gave governments substantial leeway (Slide 3).Determined response to post-pandemic inflation surge established monetary dominance So, when inflation surged across the world in 2021, the key question was whether independent central banks had the courage to tighten policy even when higher interest rates could push the economy into renewed recession and worsen fiscal metrics by raising debt servicing costs.The verdict is clear: central banks acted decisively, reflecting what independence was designed to deliver – the capacity to prioritise long-term price stability over short-term economic and political gains. This was true regardless of their concrete mandates as central banks with a dual mandate also prioritised price stability when it came under threat.[10]A second question was whether the credibility central banks had earned over previous decades could reduce the need for aggressive tightening – by anchoring inflation expectations and preventing wage-price dynamics from spiralling.[11]The answer was reassuring.In many countries, long-term inflation expectations remained broadly anchored, reducing inflation persistence and thereby compressing the sacrifice ratio – the output cost per unit of inflation reduction (Slide 4). The contrast with the 1970s is striking: back then, unanchored inflation expectations turned a supply shock into a wage-price spiral, requiring a deep recession to break it. This time, central bank credibility allowed for a soft landing.But the episode also revealed the challenges independent central banks can face as the environment becomes more demanding.In the summer of 2022, when markets sharply repriced monetary policy expectations and started to move in a disorderly fashion, the ECB launched the Transmission Protection Instrument (TPI) (Slide 5, left-hand side).[12]When uncertainty is elevated, self-reinforcing dynamics can emerge that disrupt price discovery. In a currency union, markets are more vulnerable to such dynamics, as country-specific risks may lead to fragmentation (Slide 5, right-hand side).The TPI was designed to address such vulnerabilities: countering unwarranted and disorderly dynamics that impair market functioning and hinder the smooth transmission of monetary policy. To mitigate moral hazard, the TPI sets clear conditions for the purchases of sovereign bonds, ensuring that the instrument is only used in countries that pursue sound and sustainable fiscal and macroeconomic policies.By reducing the risk of fragmentation, the announcement of the TPI created the conditions for the ECB to increase rates to the extent needed to ensure price stability, thereby shielding and reinforcing its independence.[13]The Bank of England's intervention in September 2022 served the same purpose: to restore market functioning at times of sudden disruption without compromising its monetary policy stance.Maintaining monetary dominance in a supply-shock worldThe pandemic episode was, hence, a testament to monetary dominance. It underscored the strength of an institutional framework anchored in the primacy of price stability.Today, intensifying geopolitical tensions are creating a new and equally demanding environment for central banks. Rising tariffs and export controls, heightened geostrategic rivalry and threats to territorial integrity reshape global trade and production structures.Together, these forces have exposed chokepoints in the global economy rooted in dependencies built up over decades of deepening globalisation, which has given rise to a more fragmented and less predictable supply environment that makes the trade-offs inherent in monetary policy more acute and more visible.The energy price shock caused by the war in Iran illustrates the dilemma: recent surveys suggest that, even as the terms-of-trade shock depresses demand, a rapidly growing share of European manufacturing firms are planning to increase prices to protect their profit margins from rising input costs. At the same time, signs of supply chain disruptions are re-emerging (Slide 6, left-hand side).Household inflation expectations are also adapting rapidly. In March the median euro area consumer expected inflation three years ahead to be 3%, a level similar to that observed in 2021-22, while mean expectations reached an all-time high (Slide 6, right-hand side). These developments suggest that price shocks are likely to feed through the economy faster than in 2021, as memories of that painful inflation episode are still fresh.As a consequence, investors in financial markets have reappraised the outlook for monetary policy. This has contributed to keeping market-based longer-term inflation expectations anchored around our 2% target – a testament to the ECB’s credibility. If the energy price shock broadens, monetary policy will need to tighten to contain the risk of second-round effects threatening medium-term price stability. This risk has increased in recent weeks.As such adverse supply-side shocks are likely to become more frequent, it is imperative that the inheritance from the pandemic era – the ability of central banks to tighten when the mandate so requires – is guarded carefully.[14]Over time, this capacity may face inc