ECB’s Lagarde: Inflation Surge Revealed Need for Two-Sided Reaction Function Based on Forcefulness, Persistence

30 June 2025

ECB’s Lagarde: Inflation Surge Revealed Need for Two-Sided Reaction Function Based on Forcefulness, Persistence
Christine Lagarde, president of the European Central Bank, at the ECB Governing Council press conference on December 12, 2024. Photo by Angela Morant/ECB under CC BY-NC-ND 2.0.

By Marta Vilar – SINTRA, Portugal (Econostream) – European Central Bank President Christine Lagarde said on Monday that the recent inflationary episode underscored the need for the ECB to adopt a response framework that addressed both upward and downward deviations from its inflation target.

In a speech at the ECB Forum on Central Banking 2025 in Sintra, Portugal, Lagarde said that developments like the pandemic and Russia’s unjustified war against Ukraine had shown that ‘the fundamentals of our strategy had held up well’.

The ECB’s symmetric 2% inflation target had been effective in anchoring inflation expectations, and the medium-term orientation had lowered the economic burden of disinflation while still ensuring the return to target in a timely manner, she said.

‘We therefore saw no need to revisit these core pillars – which is why we refer to the exercise we have just concluded as a strategy assessment rather than a review’, she said.

Uncertainty would be high in the future, according to Lagarde, who said that this would make inflation more volatile.

The ECB’s monetary policy had to consider risks and uncertainty, ‘using a systematic but context-specific approach’, she said.

Lagarde acknowledged that, in hindsight, publishing scenarios could have helped the ECB’s policymaking and communication.

This was the reason why the updated strategy ensured that decisions would be based on the most likely path of inflation and economic growth but also on risks and uncertainty using appropriate scenarios and sensitivity analyses, she said.

‘[T]he recent inflation surge has revealed upside non-linearities – and with them, the need for a two-sided reaction function, both in terms of forcefulness or persistence’, she said.

According to Lagarde, both forcefulness and persistence could lower inflation, but persistence might pose less risk to the economy and financial stability than raising interest rates.

 

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