ECB’s Lagarde: Must Be Prepared to Use the Flexibility our Frameworks Provide

20 September 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Friday said that monetary policy frameworks needed be able to adapt to new economic challenges and uncertainty.

In a lecture organised by the International Monetary Fund in Washington, D.C., the text of which was posted to the website of the ECB, Lagarde said, ‘My main message is that we must be ready for change and prepared to use the flexibility in our frameworks as necessary.ʼ

In an environment of great uncertainty, a key challenge currently faced by central banks was understanding how monetary policy transmission was affected by ‘transformational changesʼ in the economy, she said.

‘The challenge we face is not about our goals, which have proven successful, or our tools, which are sufficiently flexibleʼ, she said.

‘Rather, it is about how monetary transmission will be affected by structural shifts, and how we should adjust our analytical frameworks to these shiftsʼ, she elaborated.

Despite recent shocks, ‘inflation is converging towards target almost everywhereʼ with monetary policy having effectively mitigated trade-offs between inflation and employment, she said.

‘If we enter an era where inflation is more volatile and monetary policy transmission more uncertain, maintaining this deep anchor for price formation will be essentialʼ, she observed.

New challenges called for the reassessment of analytical frameworks, she said, adding that while the ECB's ‘symmetric, medium-term-oriented 2% inflation targetʼ would be kept unchanged, the policy framework needed to be more robust in reducing uncertainties and managing them.

‘While our current three-pronged policy framework provides a useful set of cross checks, the strategy review provides an opportunity to consider how to balance the information from baseline forecasts with realtime information, how to make best use of alternative scenarios, and the importance of the mediumterm orientation when faced with different types of shocksʼ, she said.

The ECB's approach should continue be based on ʽstability without rigidityʼ, allowing adjustments as the economy transformed, she said.