Overview
## Nomura Research Institute
### 1. Report Overview
This is an analytical report by Tetsuya Inoue of Nomura Research Institute on ECB President Lagarde's speech at the Sintra conference regarding the monetary policy strategy assessment. Published on July 1, 2025, this report provides detailed analysis of the main contents of the ECB's monetary policy strategy assessment published on June 30 and its policy implications. President Lagarde's speech contains important content indicating the future direction of the ECB's monetary policy management, particularly delving deeply into three focal points: response to the new economic environment, risk assessment methods, and adjustment of the policy reaction function.
### 2. Key Points
- The ECB evaluated that the two pillars from the previous strategic review (2020-21) - symmetric inflation target and medium-term policy management - were effective
- This time called an "assessment" rather than a "review," maintaining the basic framework while making adjustments
- The new economic environment is characterized by "uncertainty," with the possibility of inflation becoming more volatile
- The importance of risk scenario analysis has increased, requiring both systematic and case-by-case approaches
- Suggests a shift in focus from "forcefulness" to "persistence" in the policy reaction function
- Symmetric policy response needed for both upward and downward inflation risks
### 3. Background of President Lagarde's Speech
President Lagarde acknowledged that the ECB's previous strategic review was overly influenced by past experiences of prolonged low inflation. She explained that they subsequently faced unexpected circumstances including structural economic changes due to the COVID pandemic, Russia's invasion of Ukraine, changes in international trade due to geopolitical risks, and structural changes in labor markets. However, she evaluated that the basic framework from the previous review was effective, as the symmetric inflation target management contributed to stabilizing inflation expectations and medium-term policy management provided flexibility against shocks.
### 4. Main Messages of the Monetary Policy Strategy Assessment
In this assessment, judging that there was no need to change the basic framework, it is called an "assessment" rather than a "review." President Lagarde cited three focal points for this assessment: 1) Response to the new economic environment, 2) Improvement of risk distribution assessment methods, and 3) Adjustment of the policy reaction function. These focal points reflect the rapid changes in the economic environment in recent years and the accompanying challenges in monetary policy management. In particular, responding to the increased frequency of supply shocks and their non-linear effects is recognized as an important challenge.
### 5. Inflation Target and Policy Management
The ECB confirmed maintaining the symmetric 2% inflation target. President Lagarde pointed out that non-linear effects can occur in both low and high inflation environments. Under low inflation, as interest rates approach the effective lower bound (ELB), declining inflation expectations can lead to a self-fulfilling low inflation trap. On the other hand, under high inflation, rapid price adjustments by firms and temporal lags in wage adjustments can prolong high inflation, potentially causing upward deviation in inflation expectations.
### 6. Response to Structural Changes
As characteristics of the new economic environment, increased frequency of supply shocks and changes in corporate pricing behavior in response were cited. Compared to the past 20 years, the impact of shocks on inflation has strengthened considerably, and firms have begun to adjust prices more frequently to suppress future losses. Whether wage adjustments remain limited to compensating for past cost-of-living increases is also an important factor in considering impacts on inflation expectations. For the ECB, a major challenge is that continuous price increases due to supply shocks make it difficult for firms and households to perceive inflation rates.
### 7. Utilization Policy for Monetary Policy Instruments
In adjusting the policy reaction function, President Lagarde suggested a shift in focus from "forcefulness" to "persistence." While early forceful responses are necessary in situations where interest rates risk approaching the ELB, she pointed out that in monetary tightening phases, persistent policy management may have lower economic and financial stability costs than forceful rate hikes followed by rapid cuts. The ECB's policy reaction function can be expressed as "taking appropriately forceful or persistent policies against large and persistent deviations of inflation from target in both directions." This suggests the possibility that forward guidance may be preferred over quantitative easing when unconventional monetary policies are needed in the future.
### 8. Recognition of European Economic Challenges
The ECB is addressing the challenge of how to make economic assessments robust while facing economic instability. Considering that large shocks can lead to broad outcomes including feedback effects and non-linear impacts, consideration of risk scenarios in addition to baseline outlooks has become more important. President Lagarde cited the example of scenario analysis in spring 2022 regarding energy price impacts from Russia's invasion of Ukraine, which predicted inflation exceeding 7%, demonstrating the effectiveness of scenario analysis.
### 9. International Policy Coordination Perspective
From a communication policy perspective, the importance of the ECB conducting policy management from an insurance perspective against risks was emphasized. It is recognized as a challenge to share with firms, households, and financial markets the distribution of what weight Governing Council members place on various risks. It was also pointed out that publishing analysis of vaccination speeds and supply-demand changes after economic reopening could have facilitated policy management and communication. This suggests that highly transparent policy management also contributes to international financial market stability.
### 10. Conclusion and Future Outlook
The ECB's monetary policy strategy assessment maintains the basic framework while seeking adaptation to the new economic environment. The two pillars of a symmetric 2% inflation target and medium-term policy management were confirmed to remain effective. Future policy management will need to address risks and uncertainties through a systematic yet case-by-case approach, responding appropriately to both upward and downward deviations from the inflation target. In particular, the direction emphasizing policy "persistence" suggests the possibility of maintaining current policy rates for the time being and may also influence future choices of unconventional monetary policies. Inoue points out that from the perspective of whether the hurdle for quantitative easing has risen, attention needs to be paid to the ECB's future policy choices.
This summary was automatically generated by AI. Please refer to the original article for accuracy.
Nomura Research Institute
1. Report Overview
This is an analytical report by Tetsuya Inoue of Nomura Research Institute on ECB President Lagarde's speech at the Sintra conference regarding the monetary policy strategy assessment. Published on July 1, 2025, this report provides detailed analysis of the main contents of the ECB's monetary policy strategy assessment published on June 30 and its policy implications. President Lagarde's speech contains important content indicating the future direction of the ECB's monetary policy management, particularly delving deeply into three focal points: response to the new economic environment, risk assessment methods, and adjustment of the policy reaction function.
2. Key Points
- The ECB evaluated that the two pillars from the previous strategic review (2020-21) - symmetric inflation target and medium-term policy management - were effective
- This time called an "assessment" rather than a "review," maintaining the basic framework while making adjustments
- The new economic environment is characterized by "uncertainty," with the possibility of inflation becoming more volatile
- The importance of risk scenario analysis has increased, requiring both systematic and case-by-case approaches
- Suggests a shift in focus from "forcefulness" to "persistence" in the policy reaction function
- Symmetric policy response needed for both upward and downward inflation risks
3. Background of President Lagarde's Speech
President Lagarde acknowledged that the ECB's previous strategic review was overly influenced by past experiences of prolonged low inflation. She explained that they subsequently faced unexpected circumstances including structural economic changes due to the COVID pandemic, Russia's invasion of Ukraine, changes in international trade due to geopolitical risks, and structural changes in labor markets. However, she evaluated that the basic framework from the previous review was effective, as the symmetric inflation target management contributed to stabilizing inflation expectations and medium-term policy management provided flexibility against shocks.
4. Main Messages of the Monetary Policy Strategy Assessment
In this assessment, judging that there was no need to change the basic framework, it is called an "assessment" rather than a "review." President Lagarde cited three focal points for this assessment: 1) Response to the new economic environment, 2) Improvement of risk distribution assessment methods, and 3) Adjustment of the policy reaction function. These focal points reflect the rapid changes in the economic environment in recent years and the accompanying challenges in monetary policy management. In particular, responding to the increased frequency of supply shocks and their non-linear effects is recognized as an important challenge.
5. Inflation Target and Policy Management
The ECB confirmed maintaining the symmetric 2% inflation target. President Lagarde pointed out that non-linear effects can occur in both low and high inflation environments. Under low inflation, as interest rates approach the effective lower bound (ELB), declining inflation expectations can lead to a self-fulfilling low inflation trap. On the other hand, under high inflation, rapid price adjustments by firms and temporal lags in wage adjustments can prolong high inflation, potentially causing upward deviation in inflation expectations.
6. Response to Structural Changes
As characteristics of the new economic environment, increased frequency of supply shocks and changes in corporate pricing behavior in response were cited. Compared to the past 20 years, the impact of shocks on inflation has strengthened considerably, and firms have begun to adjust prices more frequently to suppress future losses. Whether wage adjustments remain limited to compensating for past cost-of-living increases is also an important factor in considering impacts on inflation expectations. For the ECB, a major challenge is that continuous price increases due to supply shocks make it difficult for firms and households to perceive inflation rates.
7. Utilization Policy for Monetary Policy Instruments
In adjusting the policy reaction function, President Lagarde suggested a shift in focus from "forcefulness" to "persistence." While early forceful responses are necessary in situations where interest rates risk approaching the ELB, she pointed out that in monetary tightening phases, persistent policy management may have lower economic and financial stability costs than forceful rate hikes followed by rapid cuts. The ECB's policy reaction function can be expressed as "taking appropriately forceful or persistent policies against large and persistent deviations of inflation from target in both directions." This suggests the possibility that forward guidance may be preferred over quantitative easing when unconventional monetary policies are needed in the future.
8. Recognition of European Economic Challenges
The ECB is addressing the challenge of how to make economic assessments robust while facing economic instability. Considering that large shocks can lead to broad outcomes including feedback effects and non-linear impacts, consideration of risk scenarios in addition to baseline outlooks has become more important. President Lagarde cited the example of scenario analysis in spring 2022 regarding energy price impacts from Russia's invasion of Ukraine, which predicted inflation exceeding 7%, demonstrating the effectiveness of scenario analysis.
9. International Policy Coordination Perspective
From a communication policy perspective, the importance of the ECB conducting policy management from an insurance perspective against risks was emphasized. It is recognized as a challenge to share with firms, households, and financial markets the distribution of what weight Governing Council members place on various risks. It was also pointed out that publishing analysis of vaccination speeds and supply-demand changes after economic reopening could have facilitated policy management and communication. This suggests that highly transparent policy management also contributes to international financial market stability.
10. Conclusion and Future Outlook
The ECB's monetary policy strategy assessment maintains the basic framework while seeking adaptation to the new economic environment. The two pillars of a symmetric 2% inflation target and medium-term policy management were confirmed to remain effective. Future policy management will need to address risks and uncertainties through a systematic yet case-by-case approach, responding appropriately to both upward and downward deviations from the inflation target. In particular, the direction emphasizing policy "persistence" suggests the possibility of maintaining current policy rates for the time being and may also influence future choices of unconventional monetary policies. Inoue points out that from the perspective of whether the hurdle for quantitative easing has risen, attention needs to be paid to the ECB's future policy choices.