Isabel Schnabel: Monetary policy in a world of overlapping shocks

ECB Executive Board member Isabel Schnabel said the Governing Council has raised key rates by 50bps since June, taking the deposit facility rate from 2.0% to 2.5%, in response to a renewed deterioration in the inflation outlook following the Middle East conflict. September staff projections see headline HICP inflation falling from 3.0% in 2026 to 2.1% in 2028, but core inflation is projected to rise to 2.6% in 2027 and remain elevated at 2.3% in 2028. Schnabel stressed that higher oil and gas prices, AI-driven input costs, tariffs and fiscal expansion risk broadening inflation through indirect and second-round effects, supporting a data-dependent but restrictive policy stance.

Analysis

The investable signal is not the latest policy move but the ECB’s unusually explicit willingness to lean against forecasted second-round effects before they appear in reported core inflation. That raises the probability that the terminal-rate distribution shifts higher rather than merely postponing expected easing, with the largest repricing likely in 2-5yr EUR rates over the next 1-3 months. Markets still tend to treat an energy-led inflation impulse as a growth-negative event that ultimately produces cuts; this reaction function instead makes persistent energy prices and resilient demand a bear case for front-end European duration.

European rate-sensitive balance sheets are the clearest losers if real rates stay elevated: commercial real estate, leveraged infrastructure and highly indebted consumer cyclicals face refinancing pressure well before broad earnings estimates reset. Conversely, euro-area banks—particularly BNP Paribas, Intesa Sanpaolo and UniCredit—should retain asset-yield support, though the trade is more selective than a blanket long because a delayed growth slowdown ultimately raises provisioning risk. The less obvious offset is AI capex: credit demand from ICT and conglomerates appears relatively rate-insensitive, supporting equipment demand for ASML and Schneider Electric, but higher discount rates cap valuation upside for long-duration software and unprofitable technology.

The consensus vulnerability is that energy futures’ backwardation can mechanically understate the inflation persistence relevant to policy. A further rise in gas/oil, broadening producer-price pressure, or wage settlements above ECB assumptions would force a more hawkish repricing; the reversal is equally clear: deterioration in lending volumes, services pricing and consumption would validate stronger-than-assumed transmission and re-open the easing path. Watch euro-area core inflation breadth, negotiated wages, bank-loan growth and 2yr EUR swaps through year-end rather than headline HICP alone.

Key Decisions for Investors

• Initiate a 1-3 month EUR rates bearish expression: pay 2yr EUR swap or short Schatz futures, preferably versus receiving 10yr EUR swaps (2s10s flattening). Target a further 15-25bp rise in 2yr yields; stop if euro-area services inflation and loan-growth data jointly weaken enough to pull 2027 core-inflation pricing below target.
• Run long EUFN / short IYR for 3-6 months rather than outright bank beta: European financials retain near-term margin support while real-estate cash flows face refinancing and cap-rate pressure. Size for a 10-15% relative return potential; exit if bank provisioning guidance rises materially or the ECB signals that policy is already restrictive.
• Maintain a barbell long ASML and Schneider Electric against a short basket of highly leveraged European property exposure via IYR or individual names where liquidity permits. The thesis is that strategic AI/electrification capex can withstand higher funding costs better than asset-duration businesses; reassess following AI order-book deceleration or a sustained fall in semiconductor equipment lead times.
• Do not chase a broad long in European energy consumers solely on an assumed ECB pivot. Use any short-term relief rally in chemicals, autos and discretionary sectors to reduce exposure until input-cost pass-through and demand destruction are visible in quarterly guidance.