ECB's Lagarde: Inflation and policy are in a good place

ECB's Lagarde: Inflation and policy are in a good place

ECB’s Lagarde: Inflation and Policy Are in a Good Place

European Central Bank (ECB) President Christine Lagarde recently stated that inflation and monetary policy are "in a good place," reflecting the institution's updated strategy and evolving economic conditions. This assessment follows years of aggressive rate hikes and structural adjustments to address persistent inflationary pressures while navigating heightened global uncertainty.

The ECB's Governing Council raised key interest rates by 50 basis points in March 2023 and 25 basis points in July 2023, bringing the main refinancing rate to 4.25% by August 2023. These measures aimed to curb inflation, which peaked above 8% in 2022 but has since declined, though it remains above the 2% target. Staff projections indicate inflation will average 5.3% in 2023, 2.9% in 2024, and 2.1% in 2025, with underlying inflation (excluding energy and food) expected to ease gradually.

In June 2025, the ECB confirmed its symmetric 2% inflation target, emphasizing the need for "appropriately forceful or persistent" policy responses to large, sustained deviations in either direction. This framework acknowledges structural shifts, including geopolitical fragmentation, artificial intelligence adoption, and energy transitions, which have increased inflation volatility. Lagarde highlighted that the ECB's toolkit—encompassing interest rates, asset purchase programs, and the Transmission Protection Instrument— remains robust to address emerging risks.

The updated strategy also incorporates scenario analysis to better assess risks, a response to lessons from recent shocks like the Ukraine war and pandemic-driven supply disruptions. For instance, scenario modeling helped refine inflation forecasts during the 2022 energy crisis, where baseline projections underestimated the magnitude of price spikes.

While the ECB maintains a data-dependent approach, its focus has shifted toward balancing inflation control with financial stability. The asset purchase program (APP) continues to reduce holdings at a predictable pace, while the pandemic emergency purchase program (PEPP) remains flexible to counter pandemic-related transmission risks.

Lagarde's confidence stems from the ECB's ability to adapt its reaction function, combining forceful initial tightening with persistent policy restraint to anchor inflation expectations. As the eurozone faces an uncertain future, the ECB's updated strategy aims to ensure resilience against both upside and downside shocks, reinforcing its mandate of price stability.

(https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.mp230316~aad5249f30.en.html): ECB press releases (March 2023, July 2023)
(https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.mp230727~da80cfcf24.en.html): ECB press release (July 2023)
(https://www.ecb.europa.eu/press/pr/date/2025/html/ecb.pr250630~aabf988af8.en.html): ECB strategy statement (June 2025)
(https://www.bis.org/review/r250701d.htm): Lagarde's speech (July 2025)