Isabel Schnabel: Disinflation and the Phillips curve

Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at a conference organised by the European Central Bank and the Federal Reserve Bank of Cleveland's Center for Inflation Research on "Inflation: Drivers and Dynamics 2023", Frankfurt am Main, 31 August 2023.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Accompanying slides of the speech

After more than a year of significant monetary tightening, the outlook for the euro area remains highly uncertain. Activity has moderated visibly, and forward-looking indicators signal weakness ahead. But important pockets of resilience remain, especially the labour market.

Headline inflation has come down, mainly on the back of previous supply-side shocks unwinding. But underlying price pressures remain stubbornly high, with domestic factors now being the main drivers of inflation in the euro area. Therefore, a sufficiently restrictive monetary policy is critical for bringing inflation back to our 2% target in a timely manner.

I would like to start my remarks this morning by discussing the drivers behind the recent deterioration in the economic outlook. I will ask how quickly the slowdown in economic growth can be expected to lead to a decline in underlying price pressures and whether the euro area can still hope for a "soft landing". This largely depends on the slope of the Phillips curve – a topic that will be discussed extensively at the conference later today.

I will close my remarks by explaining why the current environment of high uncertainty warrants an approach to monetary policy that is data-dependent and robust, in the sense that it considers not only the most likely future path of inflation but the entire distribution of risks. Assessing the monetary policy stance meeting-by-meeting and adjusting it when necessary will ensure that it remains appropriate at all times.