ECB's Monetary Policy Strategy Assessment (Summary of Results): Tetsuya Inoue's Review on Central Banking

Overview

## Nomura Research Institute ### 1. Report Overview The European Central Bank (ECB) published the results of its monetary policy strategy assessment on July 1, 2025, following the previous review (2020-21). This report by Tetsuya Inoue of Nomura Research Institute analyzes the overview of this assessment based on the ECB's statement and the press conference by President Lagarde and Chief Economist Lane. While there were no major changes to the policy framework or instruments, notable changes were observed in the management of the inflation target and the use of risk assessment. ### 2. Key Points - **Recognition of structural changes in inflation environment**: Shift from low to high inflation, structural changes in geopolitics, digital, AI, demographics, global environment, international finance - **Maintaining the 2% inflation target**: Emphasizing medium-term target achievement, responding symmetrically to deviations in both directions - **Hierarchy of policy instruments**: Policy rates as primary instrument, with unconventional measures used as needed - **Strengthening risk assessment**: Clarifying the use of scenario analysis and sensitivity analysis - **Regular reviews**: Next review scheduled for 2030 ### 3. Background of ECB's Monetary Policy Strategy Review President Lagarde acknowledged that while prolonged low inflation was the main challenge at the time of the previous review (2020-21), not only has high inflation occurred since then, but the inflation environment has structurally changed due to the following factors: - **Geopolitical factors**: International instability - **Technological factors**: Advances in digitalization and AI - **Demographics**: Aging population - **Environmental factors**: Climate change impacts - **Financial system**: Expansion of NBFIs, capital inflows to the eurozone, expansion of stablecoins These changes made economic assessment, policy management, and policy instrument selection under uncertain and unstable conditions the main challenges of this review. ### 4. Verification of the Inflation Target The ECB confirmed maintaining the 2% inflation target. Main features include: - **Symmetric target**: Treating both upward and downward deviations from the target as equally undesirable - **Medium-term perspective**: Allowing for short-term deviations and temporal lags in policy transmission - **Clear anchor**: The 2% target provides a clear anchor for inflation expectations - **Continued use of HICP**: Using the Harmonized Index of Consumer Prices (HICP) as the target indicator, with adoption of owner-occupied housing imputed rent still under consideration Chief Economist Lane emphasized that "medium-term" does not refer to a specific time period, ensuring flexibility. ### 5. Evaluation of Monetary Policy Instruments The ECB has hierarchized policy instruments as follows: ### Primary Instrument - **Policy rate adjustments**: Positioned as the most important policy instrument ### Complementary Instruments (when approaching ELB) - **LTRO (Long-Term Refinancing Operations)** - **Asset purchases (Quantitative Easing)** - **Negative interest rates** - **Forward guidance** ### Instruments for Maintaining Policy Transmission - **TPI (Transmission Protection Instrument)**: Ensuring uniform transmission of policy effects within the eurozone The selection of policy instruments explicitly requires comprehensive consideration of flexibility in response to shocks and balance with policy objectives (proportionality). ### 6. Analysis of Communication Strategy While the statement confirmed the importance of communication, specific measures were not mentioned. However, the following points were emphasized: - **Ensuring transparency**: Clarifying the policy decision-making process - **Dialogue with markets**: Working on expectation formation - **Accountability to the public**: Promoting understanding of the ECB's role and policy impacts ### 7. Response to Climate Change The ECB confirmed its view that climate change affects inflation through the economy and indicated the following policies: - Continuing efforts to address climate-related financial risks - Supporting the green transition within the ECB's mandate - Enhancing climate-related financial disclosures ### 8. Use of Risk Assessment The ECB will strengthen risk assessment in policy decisions. Specific approaches include: - **Systematic approach**: Regular evaluation of baseline scenarios and risk scenarios - **Case-by-case approach**: Flexible response to specific risks as they arise - **Use of sensitivity analysis**: Evaluating policy effects under various assumptions - **Communication of risk distribution**: Sharing risk assessments with markets and the public ### 9. Policy Recommendations and Future Direction Based on the assessment results, the ECB's policy direction includes: - Maintaining the symmetric 2% inflation target - Using policy rates as the primary instrument while keeping unconventional measures available - Strengthening risk assessment and scenario analysis - Improving transparency and communication - Responding flexibly to structural changes ### 10. Conclusion and Market Implications The ECB's monetary policy strategy assessment maintains the basic framework while adapting 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. The emphasis on 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 notes 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.