PRESS CONFERENCE

Christine Lagarde, President of the ECB,
Philip R. Lane, Member of the Executive Board of the ECB

Sintra, 30 June 2025

Good afternoon, ECB Chief Economist Philip Lane and I welcome you to this press conference, on the occasion of the conclusion of the 2025 assessment of our monetary policy strategy.

The Governing Council recently agreed on an updated monetary policy strategy statement. You can find this statement on our website, together with an explanatory overview note and the two occasional papers presenting the underlying analyses.

I will start by putting this strategy assessment into the broader context. Philip Lane will then go through the updated strategy statement and explain what has changed and why, as well as what has remained unchanged.

Following the strategy review we carried out in 2020-21, the Governing Council committed to “assess periodically the appropriateness of its monetary policy strategy, with the next assessment expected in 2025”. Such regular assessments ensure that our framework, toolkit and approach remain fit for purpose in a changing world.

And the world has changed significantly over the last four years. Some of the issues we were most concerned about back in 2021 – including inflation being too low for too long – have taken a rather different turn.

Not only did we see inflation surge, but some fundamental structural features of our economy and the inflation environment are changing: geopolitics, digitalisation, the increasing use of artificial intelligence, demographics, the threat to environmental sustainability and the evolution of the international financial system.

All of those suggest that the environment in which we operate will remain highly uncertain and potentially more volatile. This will make it more challenging to conduct our monetary policy and fulfil our mandate to keep prices stable.

During the strategy assessment, we asked: what do these changes mean for the way we assess the economy, conduct our policy, use our toolkit, take our decisions and communicate them? In seeking to answer this question, our mindset was forward-looking.

On the whole, we concluded that our monetary policy strategy remains well suited to addressing the challenges that lie ahead.

But our strategy also needs to be updated and adjusted in certain areas, so that the ECB can remain fit for purpose in the years to come. The next assessment is expected in 2030.

With our updated strategy statement, we are taking a comprehensive perspective on the challenges facing our monetary policy, so that the ECB can remain an anchor of stability in this more uncertain world.

This is our core message to the euro area citizens we serve: the new environment gives many reasons to worry, but one thing they do not need to worry about is our commitment to price stability.

The ECB is committed to its mandate and will keep itself and its tools updated to be able to respond to new challenges.

Let me conclude by thanking, on behalf of the Governing Council, all the colleagues across the Eurosystem who have contributed to this assessment in a great team effort.

I now hand over to our Chief Economist Philip Lane and, following his remarks, we will be ready to take your questions.

* * *

Philip R. Lane: I’m going to focus on the 12 paragraphs of The ECB’s monetary policy strategy statement. What’s important is that behind these paragraphs is a lot of work. The base layer is the two occasional papers. I’m sure you’ve already read the 400 pages in those two occasional papers. There’s a lot of rich new analysis of many dimensions in those two occasional papers. Then we have the overview note, which the Governing Council worked on collectively and which basically provides the elaboration behind these 12 paragraphs. And I would say that in these 12 paragraphs, in this review, we essentially tried to review the economic assessment: where are we and where are we likely to be? That was one of the two work streams. That essentially primarily shows up in paragraph 1.

So paragraph 1, you might say, is one paragraph, but it’s a very important paragraph because it essentially outlines the challenges that we may face. We had a similar paragraph last time, but last time the focus was essentially on a lot of factors that can give rise to a low-inflation world and a low interest rate world. Whereas the assessment this time of the Eurosystem staff behind this is that when we look where we are now in the structural changes facing the world economy, we have geopolitics, and a lot of this is in the direction of rolling back globalisation. Last time we were looking at globalisation as a force which did contribute to low inflation before the pandemic. There are many dimensions to geopolitics, but we are of course already living it and this is something we do think is going to shape the next five years. We already mentioned digitalisation the last time, but this time we’re calling that as a separate and important element: artificial intelligence. Because, of course, I think for a long time it has been understood that the world economy automates and digitalises. That’s been around for a while. That’s mature. What’s not mature and where there’s really a wide range of possibilities is: what does it mean as the business sector and the public sector incorporate artificial intelligence? I think we had already called out demography and the threat to environmental sustainability, and I think we’re very correct to have done so five years ago. We’ve seen a lot on these fronts in these five years. Let me remind you: without immigration, the European labour force would be shrinking. So demography is not just a future trend, it’s a year-by-year reality for us. And then this week, last week, this year, last year, all the time we see the impact of weather shocks and the impact of the green transition. By the way, investment in Europe in recent years would have been a lot lower without the green transition. It’s the one solid driver of investment for many sectors at the moment. We call out all of these elements, but what’s critical for our conclusion for monetary policy is that it creates uncertainty, it creates volatility, and we think what we may be faced with is larger deviations from our 2% target in both directions. So we have this two-sided risk assessment. And as I go through these paragraphs, essentially once we’ve identified this economic assessment, the natural question to ask is: how do we manage it? How does monetary policy manage this two-sided risk? And essentially in what follows, we will turn to the monetary policy implications. But the other thing to note about paragraph 1 is that there is a new sentence. That’s the final sentence. It is that we don’t live in a bubble. We don’t say monetary policy is the only game in town. And we do highlight here that a more resilient financial architecture – supported by progress on the savings and investments union, the completion of banking union and the introduction of a digital euro – would also support the effectiveness of monetary policy in this evolving environment. So, in other words, all of these structural changes are much more easily handled if we have a more resilient euro, European and euro-denominated financial system. And I think that’s also important and maybe helps you to understand why we as Board members, and more generally the Governing Council, spend a lot of time talking about these wider issues. It’s not a distraction from monetary policy. It’s an important underpinning for monetary policy.

Paragraph 2 is unchanged because paragraph 2 is setting the legal context. We have a mandate given by the Treaty, and so to make the strategy statement self-contained, it’s a reminder to you of the legal and Treaty constraints we live under. And that essentially remains the same as last time.

The third paragraph, because remember in the European Treaty there’s not a super detailed definition of price stability, so it’s important and this is something that evolved over the years: that in terms of measurement, we’re focused on the Harmonised Index of Consumer Prices (HICP). And again, this is stable from last time. Last time we highlighted that we did think a reform of the HICP to include owner-occupied housing would be desirable. We continue to hold that view. But in the end it’s for the European Statistical System to make progress on that. So what we say is that in the meantime we do take into account inflation measures that include estimates of the cost of owner-occupied housing. So, in other words, we create supplementary indicators. These are not official data, but we do take a look. And these would be relevant in scenarios where house prices were rising far more quickly or far more slowly than the overall inflation rate. By the way, this has not been particularly the issue in recent years. It would not have made a big difference in recent years, but of course in principle we could be in a situation in the future where it made a difference.

Paragraph 4 is again largely stable from last time. It’s explaining why we target 2%, not zero, and that’s a fairly mature topic: why you want to have a safety margin. We do, and I think correctly this time, in the final sentence of paragraph 4 include intersectoral adjustment. In the last five years we’ve seen this massive change between goods prices and services prices. And actually it turns out that that’s a very important consideration. It’s a lot easier to handle an under 2% inflation target than if you’re trying to hit zero. Essentially if you’re trying to hit zero and the price of energy compared with goods rose, implicitly you need to drive down the price of goods. And we know for many reasons that deflation, even at the sectoral level, is difficult. So having a 2% target is reinforced by including intersectoral adjustment in that list. So, paragraph 4 says you need a safety margin.

Paragraph 5 says 2% is the best way to maintain price stability and that our commitment is symmetric. So what this symmetry means is that we consider negative and positive deviations from the target as equally undesirable. The last sentence, I think, has been critical in these years: having a clear target. You may have heard us all many times say 2%. It’s not somewhere in the region of 2%. It’s 2%. And having that clarity is very important for anchoring expectations, so I think it turned out that that choice we made to be precise about what our orientation is in the medium term is very important.

Let me turn to a paragraph where I think there has been an important change, a sensible change – something that you might say sounds so sensible, why are you talking about it? But it’s worth highlighting the update. Last time, in 2021, we felt we needed to point out that the symmetry of the target doesn’t mean that how we set monetary policy looks identical whether we’re above the target or below the target. And so we pointed out that if we have a lower bound issue, we need to be appropriately forceful or persistent. What have we learnt from these five years? That remains true for below-target inflation, but actually it’s equally true for above-target inflation. And what we actually did was we had a phase of being forceful. So from July 2022 to September 2023, we hiked a lot. And then we went into a persistent phase. So from September 2023 to June 2024, we had 4%. The overview note goes into more detail about why you need the blend of forceful and persistent. But when we reviewed this, peers said these were important concepts in relation to the lower bound, but they’re equally appropriate concepts in relation to being above target. It’s not, of course, in relation to blips. What we talk about here is in response to large, sustained deviations. So you have to first of all make the call. What we see in front of us is something that’s materially away from 2% and that would remain away from 2% unless we responded. And this is why we say “appropriately forceful or persistent”, because what exactly is appropriate depends on whether you are dealing with an upside shock, a downside shock and a wider set of issues. So that, I think, is important. Let me come back to this issue that we have a symmetric commitment and we’re two-sided, but the headache is different on both sides. On the downside, the lower bound is the main headache. On the upside – and this reflects so much of the last number of years and reflects a lot of the work in the occasional papers – is possible non-linearities in price and wage-setting. What we learnt is that once inflation starts to build, it can take off and it can accelerate. You can get this non-linear dynamic. And that’s why you need to be forceful on the upside. That’s not really true for downside shocks. They tend not to accelerate, but downside shocks tend to get embedded because your ability to respond on monetary policy is different.

Going back to this point that it’s not about smoothing out every deviation from 2% and it’s large, sustained deviations: this is very much in the spirit of the medium-term orientation. And that’s paragraph 7. So paragraph 7 is stable. We already had a medium-term orientation, I think, throughout the whole history of the ECB. And I think that’s been very wise. Our commitment, in line with the opening remarks from the President, is that people should be able to count on our commitment to price stability. If we see a deviation, we will bring it back to 2%. And that’s our medium-term orientation. There’s one enrichment here, which I think makes sense. People often ask: how long is the medium term? And I think a very important discipline on that is in the final sentence now: “subject to maintaining anchored inflation expectations”. That really defines the medium term. As you know, in recent years we mapped that into “we will make sure inflation returns to target in a timely manner”. You need to impose some discipline on yourself as opposed to saying the medium term is always just over the projection horizon. The medium term means not so long that the anchoring of expectations is put at risk. So again, I think that’s always been true, but it’s better to be explicit about it. And maybe now, as journalists, if you ask Governing Council members in the future how long the medium term is, the medium term is how long it takes without putting into question the anchoring of expectations.

Paragraph 8 is our toolbox paragraph. We already said in 2021 that our primary instrument is the set of ECB policy rates. I do wonder, for those of you who were involved in looking at the ECB in 2021, how many of you fully believed that as we moved away from the lower bound, we would stop quantitative easing (QE) and we would stop forward guidance? But that was in our strategy and that’s what we did. These are tools that make sense at the lower bound. They are not tools from a stance point of view that have the same role away from the lower bound. So one basic message is: already in 2021 we told you a lot about how the toolbox works, but we did obviously come back and look at this. It’s an important topic. Let me highlight a couple of revisions here, or amplifications. One is that I think we are more articulate now about when these tools come into play. One is to steer the monetary policy stance when the rates are close to the lower bound. That’s what we said last time. That’s definitely a big category. But the second category is “or to preserve the smooth functioning of monetary policy transmission”. March 2020 is one example. When the world’s financial market was hit by the pandemic shock, central banks in general did a lot of asset purchasing, refinancing operations and other elements to stabilise the transmission of monetary policy. So again, what I would say is either it’s because we’re near the lower bound or there’s some big drama causing an interruption to the transmission of monetary policy. But otherwise these instruments remain in the toolbox. They’re available, but they’re not used on a continuous basis. And so we list out these tools just as a reminder. Longer-term refinancing and asset purchases: those two would possibly be used either way. For the stance or for smoothing the transmission of policy. Whereas of course negative rates and forward guidance are more particular to the lower bound. So there is a differentiation within that category. We also said last time that we will respond flexibly to new challenges as they arise and we can consider new instruments. And of course we told you that we considered new instruments and we actually did it, because we did introduce the Transmission Protection Instrument in 2022. And then the last sentence is important because this is where a lot of the discussion in the last year has been. It is to look back at these this set of instruments and on a forward basis say, in the future, if we ever came to these situations, how would we use these instruments? So we say in this important sentence: the choice of which one we use or which combination we use, the design – because on day zero, we usually have a press release or a legal act saying here’s the design of our instrument – and the implementation. So in other words, month by month, how we adjust it and how we bring it to an end in terms of exit. All of these, number one, will enable an agile response to new shocks. So let’s not get locked into rigid programmes that would inhibit our ability to respond to new shocks. They will reflect the intended purpose. So there can be differences between a stance-orientated intervention and a transmission-smoothing-type intervention. And then, of course, all of these will be subject to a comprehensive proportionality assessment. So in considering the choice of tools, the design and the implementation, we need the checklist of whether this is proportional to the challenge we face. So that’s, as I say, the toolbox.

Then paragraph 9 is explaining how we make decisions. A lot of this is similar to last time. Last time we basically had to tell you that we’ve decided, rather than having a two-pillar strategy where we have an economic pillar and a monetary pillar, we make an integrated assessment. And in that integrated assessment, for example, we take into account macro-financial linkages, financial stability and so on. So a lot of that remains, but maybe you might find this new sentence interesting. The second sentence is that in how we make decisions, we take into account not only the most likely path for inflation in the economy, i.e. in a projection for the baseline, we don’t just look at the baseline, but also the surrounding risks and uncertainty. How do we do that? Including through the appropriate use of scenario and sensitivity analysis. This is something we have done forever, but it’s probably true that it’s not always visible in how we communicate. And also internally, of course, the science of how you should do scenarios and the science of how you should make sure your decisions are robust is always evolving. So we do want to make this clear. And in fairness for you and for others watching us, you can say “I think I understand this decision in the context of the baseline, but I have a natural question: is it also robust to the risk assessment of the ECB?” And I think that will be a step forward in the conversation about monetary policy. By the way, this is already reflected, importantly, because, as you may have noticed, what we’ve said in the last couple of years is that we make our decisions not only based on the inflation outlook, but also in relation to underlying inflation and the strength of monetary transmission. Because those two dimensions capture a lot of risk. Underlying inflation captured a lot of risk when we were bringing inflation down from 10% to 2%. The strength of monetary transmission captured a lot of risk as we moved interest rates, first of all, steeply upwards and then as we’ve been reversing. So the logic behind the three-pronged reaction function that we’ve been using reflects these principles.

Paragraph 10 reaffirms, and I think everything we’ve learnt from the last four years validates the assessment that, in terms of price stability, climate change has profound implications in terms of the structure of the economy, the rise and fall of particular sectors, the cycle, including through the impact of weather shocks, and also in terms of how the financial system is adjusting. This is also a policy priority for the European Union and a global challenge. So we are committed to ensuring the Eurosystem fully takes into account, in line with the EU’s goals and objectives, the implications of climate change and nature degradation for monetary policy and central banking. We added – because we’ve already added it elsewhere – “and nature degradation” because essentially it’s the same headache. And in terms of our economic analysis, you’ve also seen it in our publications. The same underlying failure to incorporate the global public good of a sustainable environment permeates that.

Paragraph 11 reaffirms that clear communication is centre stage of our policymaking. We want effective communication at all levels. And this is why we think the layered and visualised approach to monetary policy communication is essential. Also, we want to adapt in this rapidly changing communication landscape. There’s more on that in the overview note. And, as you know, the ECB has been rolling out new types of communication, including Espresso Economics on YouTube in recent times.

And then maybe in line with the idea that it’s good housekeeping to have a regular calendar-based commitment, the next assessment of the appropriateness of the strategy will be in 2030.

My first question is for President Lagarde. Tell us about the learning points. What would you do differently if you could go back? The second is for Mr Lane. Would you say that the bar for QE will be higher in the future than it was in the past? I mean about launching it and about keeping it running, knowing what you know now.

Christine Lagarde: What have we learnt and what do we do differently going forward? Because I remind you that the strategy exercise that we’ve conducted is really to take stock, understand, appreciate the shortfalls and the upside of what we had planned and then, looking forward, see what needs to be improved. And I would say that given the exercise that was conducted in 2021, which was thorough, deep, drew on all the competences around the whole Eurosystem and produced, I think, 18 occasional papers from 13 workstreams, if you remember. Now you only have two occasional papers. So, given that the depth and the very broad ranging that was conducted in 2021, there is a lot that is still completely valid today. As Philip has explained, some of the paragraphs in what I call the “12 commandments” are still perfectly valid. But I would say that the exercise that we conducted in 2021, although we had the 2% symmetric target in the medium term and we had a lot of the tools that have been identified – not quite all – was probably more influenced by the past that we had gone through. And as a result, if you look at the conclusions, there’s an element of ELB [effective lower bound] about the strategy exercise of 2021. Given that we went through that rollercoaster sequence of very low inflation rate, very high inflation rate, and have now managed to bring inflation under control back to our target, I think the virtue of the strategy is that it’s a strategy for all circumstances. It is well informed by the 2021 exercise, if ever there is another ELB moment and an effective lower bound where the number of instruments we can use is limited and needs to be far-fetched in a way. But we are also well equipped for what we have seen, which is much higher inflation. And that led to, I think, one of the key changes that Philip Lane has identified, which is this two-sided reaction function in order to avoid what is undesirable downside and what is undesirable upside. So that brings me to say we are equipped for all circumstances.

Philip R. Lane: I think the toolbox paragraph, as you might imagine, both last time and this time was carefully considered. And I think it’s also important to remember with QE – and this is why we’re more explicit this time – there are two very different scenarios. One is monetary policy stance: we’re getting close to the lower bound and, if we assess that there is a sustained material deviation from 2%, we have a list. So we list out at that point and say “what’s in the choice set?” We could look at asset purchases, we could look at long-term refinancing operations, we could look at rate forward guidance, we could look at negative interest rates. So here’s our menu and let us go through the list of pros and cons in terms of effectiveness, agility, side effects. I’m not going to get into one-liner-type summaries because of course it’s decisive in what exact context are you talking about? They’re unconventional for a reason. They’re all inferior to using the policy rate for the stance. So that’s one scenario: you’re running out of room on the rate and then you have to turn. I would say, by the way, compared with five years ago, we do say in the overview note that probably the equilibrium real rate has nudged up a bit – not super high. So, in other words, the probability of hitting the lower bound is probably lower than it was five years ago. So it remains a concern, but it’s not necessarily at the level we had five years ago. In any event, that’s one set of issues. No easy choices, but any future edition of the Governing Council has to go through that. The strategy will say: here’s your list, here’s how you make decisions about using them, agility, side effects, effectiveness and so on. In the overview note, it also says quite often a combination is more effective. So rather than overloading any one instrument, using a package of instruments can be more effective. The other element is for market-smoothing transmission. Sometimes you do need to go in and replace if the private sector is exiting, but that can look very different. And how we design a pure market-smoothing-type intervention would look quite different than a kind of a stance-type intervention. And then with the commitment to making sure any new programme is agile, I’m sure any future time we do QE, no matter whether it’s for stance or for smoothing or for some combination – remember, the pandemic emergency purchase programme (PEPP) was a combination of both – the way we write it in terms of the programme, in terms of making sure it’s agile, that will definitely look different, because last time we keyed the end of some of these programmes to shortly before we raised rates. But I’m sure we’re going to have a more expansive way of thinking about when we stop, including this basic idea of scenario analysis – that, in other words, it’s not just about under the baseline, but also in line with the evolving risk assessment. It would expand the way we think about the future, not just going into QE, but coming out of QE. I’m sure it will look different.

I have a question on a side phrase you actually said in the first part of the statement – that changes in the international financial system will have effects on how to actually forecast inflation as well. What do you have in mind when you say that? Which changes are there? And also I would love to hear from you what you think will be the effects from AI usages across the whole spectrum. Will it rather be disinflationary or will it push prices up? What is your early gauge?

Philip R. Lane: What I would say is we did write the financial system last time. And honestly, what we would have had in mind is, for example, the shift between banks and non-banks. We’ve generalised it to the international financial system because, first of all, even that – banks versus non-banks – there’s a big global component because, of course, typically the non-banking world has many currencies in their portfolios. So that’s one element. I mean, honestly, from my point of view, it also includes what we’ve seen this year. This year we’ve seen the euro appreciate, and that’s clearly reflecting a shift in global investor preferences. So that’s a very basic example. We also put in later in that paragraph that a more resilient European financial architecture would help to support monetary policy. So again, I think the world would look different with savings and investments union, banking union. And I’m not saying from the point of view of monetary policy transmission, but in terms of protecting the monetary autonomy of the euro area, the digital euro, I think, is important for that.

Christine Lagarde: I totally agree with what Philip just said. I would add that we just have to be alert to changes that are taking place and will be taking place in the financial sector. And I think that the emergence of new payment mechanisms – and here I’m thinking about some of the most recent developments in stablecoins, for instance – will have an impact on the financial sector as well. And to the extent that our monetary transmission is relying heavily on the financial sector, we have to be very attentive to how that is going to restructure the existing channels of transmission that we are used to. It might very well, and we have to be attentive to that. On artificial intelligence, we could spend the next day discussing that. Two things: one is I think we are more and more – all of us, central banks around the world, but certainly at the ECB – using artificial intelligence in multiple dimensions and for multiple applications. And I think the principle that we try to apply for that is being extremely cautious and attentive in how it is used and how it is validated and what data it relies upon. So not blindly following artificial intelligence-produced models or results from them, but checking and verifying. So trust but verify, as famously quoted by Ronald Reagan, is certainly one that that would apply to our own use of artificial intelligence. As far as the economy is concerned, it is going to be transformational. How heavy it will be in terms of investment, how it will disseminate, how the business models will form and what impact it will have on labour, what productivity gains there will be, I think, is highly speculative, and you will find opinions in the literature at the right and the left end of that range. And if you remember last year in Sintra actually, we had some really interesting and insightful views about how transformational it would be and what impact it would have.

I’d like to know how the updated strategy will influence the upcoming rate decisions. For example, will there be even more focus on the medium term versus the dip below the target in 2026, so maybe reducing the need for another cut? And second, on the implication of the international role of the euro – you have been very vocal on that recently. How would a bigger role for the euro influence the monetary policy of the ECB or its strategy? There are discussions about structural overvaluation of the currency. There are discussions about lower borrowing costs for governments and companies. What is your assessment on that point?

Christine Lagarde: On your first question, I’ll let Philip take you backstage so that you appreciate how the work is done, how the analysis is conducted on the basis of these proposed changes that have been approved unanimously, by the way, by the Governing Council in terms of what tools we have, how they inform each other, how much weight we give to risk and the role of scenario analysis. So Philip will take you backstage so you understand how decisions are thought through. But on the international role of the euro, I would like to refer you to a speech that I gave in Berlin about two weeks ago in which I identified and articulated very clearly the three key components which any international currency should have if it wants to be one of the reserve currencies. And that spans from a geopolitical role, an economic role and legal certainty. And I think on the three accounts, as I said in that particular speech, we are well positioned, but we have work to do. And I know that, typically, the cynical view is: well, maybe, but why? Well, maybe, we shall see. But one thing that I know we shall do as a central bank is deliver on the mandate that we have: provide the beacon of certainty in a world that is vastly uncertain. We will deliver on our mandate. We will commit to that price stability. And when people in the economic sphere ponder what is solid, what is not solid, we want them to appreciate that what we do is solid and the outcome of our work is robust. The rest is going to belong to other decision-makers and other policymakers. But I think that there is a path. And that path will impact us as well, if we move forward in terms of banking union, even further than crisis management and deposit insurance, which is now agreed among the European Member States, if we move further than small steps on capital markets union, if the concepts that abound at the moment in terms of safe European assets prosper, then we shall see each other next year and some progress will have been made on that route to a broader international role of the euro.

Philip R. Lane: First of all, I’ll say both between the 2021 statement and now, that gives you already a lot more context for how we make decisions. Before that, you have to go back to 2003, I think, to the last review. And remember, I joined the Governing Council in 2015 as governor of the Central Bank of Ireland. So I remember the ancient history as well. And what I would say is: honestly, outside the ECB people were trying to invert or reverse engineer how we make decisions. For example, they might say your decision’s driven by the point estimate at the last year in the forecast. That was a popular way. You just need to look at one number and that drives the decision. But never has that been a good guide, because it’s always the case that central banks take into account risk and uncertainty. So it’s very important to look at how we go from here into 2026 and into 2027. In December, we’ll be looking at 2028. But no matter what the projection horizon is, we’re always going to be keeping an eye out, because some of these dynamics will also play out longer. And so what we’re going to be doing – and this is why we are very data-dependent, meeting-by -meeting – number one is some of the big drivers of the forecast, like how we’ve seen a lot of volatility in energy markets recently, we have the exchange rate. So there are going to be updates on that meeting-by-meeting. But then one of the big issues in the economic occasional paper is this issue about how shocks get transmitted across the economy. And the reality is there’s going to be a long period now, which I think was also in the Bank for International Settlements conversations this weekend, when the old assumptions that essentially a lot of firms would just absorb cost increases without responding, which was true for a long time, but then in the pandemic they responded by raising prices. So the issue now is we have had a big movement in energy prices, a significant movement in the exchange rate, among other factors. What we do not know now, but we will be learning month by month is: is this widening across the economy? Are we seeing the service sectors that use a lot of energy adjust their pricing and so on? So nothing is precooked. A lot is going to turn on how these shocks to the economy permeate. You will have heard many people comment over the years that it’s always 2% at the end of the projection horizon, but that’s a common feature of central banking. Another big influence is basically our monetary policy. So the reason why we have 2% in 2027, a big reason, is that people believe us. People believe that we will do what’s needed to bring inflation back to 2% in the medium term. And so when we make a forecast, it’s embedded that monetary policy will respond appropriately to the shocks. So in other words, I’d imagine most of the time you will see 2% in the medium term. That doesn’t mean it falls from heaven. It means monetary policy will adjust and that any short-term deviation will not be permitted to be sustained. So what I would say is the question is: “What do we need to do?” And what we need to do will depend on the incoming data, our assessment – is this is a sustained deviation from our target? If we didn’t respond, would it get embedded? There’s a big checklist and what I would say is that we would like to try and give you as much as we can in terms of information in the projections on top of what we say as the Governing Council. There is a projections article afterwards. There are many blogs, working papers and so on. But we also don’t publish plenty of material because it needs to remain confidential in a good preparation for the meeting. At a confidential level, we go through many “what if” scenarios. We do many sensitivity analyses. The staff publish, in the projections article, what happens if the exchange rate is at the 25th or 75th percentile, what happens if energy prices move. But we do far more than that. This remains ongoing work. And so it sounds super simple as long as inflation is at 2% in the medium term, but behind that is: what do we need to do to maintain that, to protect that anchor?

Given the international context since the last review – COVID, wars, trade – how does the ECB respond to critics who say that it should significantly change the toolbox instead of trying to keep it the same?

Christine Lagarde: We take critics and criticism, and we are actually quite used to it, but we pay attention because obviously it identifies where the perception by others than those backstage making the decision is. And if there is a perception that there is a shortfall, that there is something that hasn’t worked, then we look at it and we take that into account. So during the various crises and the major shocks that were in a way successive but also compounded, we responded and I think we demonstrated great agility in responding to those shocks and to this line of shocks. For example, we came up with a new instrument that simply didn’t exist at the time: the Transmission Protection Instrument that we came up with in July 2022, it didn’t exist, it wasn’t in the toolbox. The other instruments that we worked on weren’t needed eventually, but that’s what we do because we’re guided by the mandate that we have been given, the target that we have decided and we flexibly and with agility respond to new situations. But the beauty of the exercise that we’ve conducted, I think, is to take stock and keep what was to be kept from 2021, but also look at what we learnt from the last four years and improve the instruments that needed to be improved in order to refine the projections, arrive at better proposals and have even more robust recommendations. I think the example that Philip just gave, where of course the baseline is decisive and of course we have regularly conducted scenario analysis and of course we have conducted sensitivity analysis, but I think that the change that Philip has identified is that it’s not going to be the scenario analysis with a few exogenous causes, as we have done in the last four big published scenario analyses. We’re going to go deeper than that and anticipate the transformation that will affect the economy going forward and we will test what we are proposing against those scenarios and inform the baseline that still remains decisive with those scenario analyses. I hope I’ve addressed your question.

Could you give us a little bit more colour on how to really make sense of this increased focus on the fact that you will also fight inflation forcefully and persistently when it goes up? But at the same time you stress, Philip, that you will only do so if it’s not a blip, but a persistent and permanent trend. If we travel back in time to 2021 and 2022, I think the problem back then wasn’t that the ECB said “we won’t fight inflation if it’s going up persistently”, but for quite a long time it was thought that it’s not a persistent thing. So if the current approach had applied back then, would it have been different or not? As a learning exercise more than as an implicit criticism. And my second question is on the toolbox. You stress that the unconventional tools are still part of the toolbox and then you give some examples of what those instruments are, but it’s clearly not a closed list. So are there any tools that are off limits, and if so, which are they? Was this discussed in the strategy review or is basically everything possible if you think it’s necessary?

Christine Lagarde: I just want to remind you that we believe collectively as a Governing Council that any significant or material deviation from our inflation target on the way up and on the way down: full symmetry. You only talked about inflation on the way up. So, it’s full symmetry. And the response is of course going to be context-specific and is going to be a two-sided response to avoid the material deviation that we do not want. It’s undesirable at both ends.

Philip R. Lane: If you take a longer history of the ECB, it’s probably fair to say as inflation fell below 2% ten years ago, the ECB did take some time to say whether it was a material sustained deviation or whether it will self-correct. The issue about making the call that this is something that warrants a monetary policy reaction, this is why I don’t think we’re going to be replaced quite yet by the AI. It’s going to require a lot of work, a lot of judgement in both directions. And fundamentally, I think we definitely had a baseline in 2021 and even in early 2022 that essentially there would be a reversion back to target fairly quickly and therefore there was not a big monetary policy call. So then the question is the risk assessment. At the time, and I went back to the 1970s and 1980s and there were papers about non-linear adjustment, but there was, for a while, maybe not so much evidence that the non-linear adjustment was taking over, but then by summer it was very much in our face. So now we know that the whole pandemic is going to leave a legacy because we have a concrete example now where actually the non-linearity has moved from being theory to being actually visible. And there’s a plausibility now that people are more used to raising prices, there’s a plausibility that maybe that can kick in even in different circumstances in the future. So what I would say is we didn’t spend our time going back and doing a genuine kind of full-scale, put ourselves back in that position and see, because I think that’s impossible to do. What’s important is to learn from the episode. What I would say is with this new strategy we are, if you like, pre-committing here that whatever we decide to do is based not just on the baseline, but also on the risk assessment. So you collectively will be asking us: “Your decision looks OK under the baseline, explain to me how it’s also robust – as far as it can be robust – under the risk assessment.” So I think that is the difference because that was maybe not the way the conversation was at that time. And maybe just to join the President again, this issue is working out. What I would say is what we already heard the last time – the scale of the monetary policy response depends on the scale of the problem. Sometimes you need to campaign, with a campaign then going from -50 to +400 over a year. That was a big campaign. We’ve had a big campaign since then. Where we are now is we’ve come back to target and we’ve brought rates down a lot. So sometimes you have a campaign and sometimes you’re in cyclical management, you’re nudging in response to smaller-scale risk assessments. So hopefully we’re in a calmer world, but we’re not signing up to any assessment of where we’re going. And let me come back to this issue, because the temptation is to say: is AI going to be net inflationary? That’s not the way to think about any of these. The way to think about it is it creates uncertainty. We do think it creates volatility and honestly with most of these, I can see scenarios where in one time period it’s downside, in another scenario it’s upside. So all of this is basically stuff we have to integrate, but it’s not leading us to a universal net message. With AI right now there’s a lot of investment in data centres and so on. We’re in an investment phase. At a different phase, we could be in a productivity-enhancing phase where they really are lowering costs in the economy. And the exact time periods where either the demand side or the supply side dominates, that’s going to be the subject we’re going to have to watch for in the coming years.

You talked about the world becoming more unpredictable, possibly more volatile. Why not review the strategy more frequently? Why not have even more reviews rather than waiting till 2030 because of some of the trade-offs there. And then to bring us back to climate, the language there still seemed quite forceful around the importance of climate change and thinking about these objectives – were there any reflections on the limitations of what the central bank can do in terms of also its own distribution of resources towards this issue in a more volatile world?

Christine Lagarde: You actually addressed with your second question the response I was going to give you on the first, because if you’re proposing to the team which is sitting in the back of the room that we should do the strategy assessment every year, I think they’re going to have a fit because this is a massive exercise. Each workstream had the coordination of about 200 experts, economists of all stripes from around the Eurosystem under the leadership of both Christophe and Christiane, who each had to harness the competence, the egos and come to some sensible conclusions that were then debated and put to the Governing Council for further iteration and eventually unanimous support. So it’s a massive exercise. Second, the way in which it has been orchestrated and calibrated now, I think, gives us what I call a strategy for all circumstances or a strategy for all seasons. Whether we get way too high or way too low, the toolbox is there. The assessment that we will do is technically soundly based, as has been described, and we have our focus on stability, as we have defined, delivering target inflation, as we have defined it, with the same unequal tolerance for material deviation respectively from the downside or from the upside, with context-specific responses that we are characterising as two-sided responses. On climate, the inclusion of climate in 2021 was a bit of a breakthrough because not everyone was convinced. This particular time, there was a lot less debate as to the relevance of climate change as a component in our assessment of the economic situation, of the risk of inflation, of the price impact and of the risk management that we are accountable to European citizens when it comes to the validity of our monetary portfolio, but also of all the portfolios for non-monetary purposes as well. As you will have noted, we’ve added one word, which is nature degradation, which did not feature in the 2021 strategy. And that is just to follow suit from what has been clearly flagged by the European Commission as another component of the same disaster that we’re facing.