ECB president discusses returning to basic monetary policy in a changing environment

Christine Lagarde, President of the European Central Bank (ECB), delivered an introductory speech at the ECB Forum on Central Banking 2026 in Sintra, Portugal.

She highlighted that over the past 15 years, the euro area faced extraordinary pressures requiring unconventional responses, including asset purchases, refinancing operations, and new instruments to address fragmentation.

With the environment now changing, she stated that monetary policy is returning to its basics, primarily using policy rates to stabilize inflation. The ECB can now make measured adjustments, relying on data-dependent decisions made meeting by meeting.

Lagarde explained that this return to basics does not mean a return to past ideals but involves applying core principles in new ways due to current challenges, such as rising supply-side shocks and geopolitical risks.

Factors enabling this shift include the movement of interest rates away from the effective lower bound, strengthened policy frameworks, reduced fragmentation risks, and increased resilience of the banking sector and fiscal frameworks.

She noted that Europe’s resilience has allowed monetary policy to focus on inflation stabilization without being constrained by fragmentation or banking vulnerabilities, despite substantial shocks like US tariffs and oil disruptions.

However, she emphasized that the global geopolitical environment introduces new complexities, with shocks that can escalate and unwind rapidly, requiring flexible and innovative policy responses.

Lagarde discussed the importance of using concrete, real-time indicators and improved projections to guide decisions, especially in uncertain conditions. She highlighted the use of scenario analysis to test policy robustness across different plausible outcomes.

She clarified that the ECB’s decisions are guided by inflation outlook, underlying inflation dynamics, and transmission strength, with market expectations adjusting in advance, reducing the need for forward guidance.

In conclusion, she reaffirmed that while the basics of monetary policy remain unchanged, applying them effectively in today’s environment requires continuous adaptation and innovation.