Back to basics in an uncertain environment

Introductory speech by Christine Lagarde, President of the ECB, at the ECB Forum on Central Banking 2026 “Shaping Europe's future: innovation, growth and stability” in Sintra, Portugal

Sintra, 29 June 2026

It is a pleasure to welcome you to the ECB Forum on Central Banking.

Over the past 15 years, the euro area faced an environment of extraordinary pressures that called for unconventional responses.

The sovereign debt crisis brought us towards the effective lower bound. The pandemic collapsed demand further. We responded with asset purchases and refinancing operations to support the economy, and new instruments to address fragmentation.

Our toolbox expanded in other ways too: forward guidance with lift-off criteria, sequencing commitments, links between different policy instruments.

When the environment reversed and Russia cut off our access to natural gas, we responded with a conventional instrument used in unconventional ways: the fastest tightening cycle in our history, raising rates in increments we had never used before.

But in today’s environment, monetary policy now finds itself in a different position.

We no longer need to reach for unconventional instruments. While we have them at hand, we can now focus on stabilising inflation with policy rates as our primary tool.

We no longer need to act with the same force. We can make measured adjustments to rates, calibrated to the shocks we face.

And we no longer need complex forms of forward guidance. Our decisions are data-dependent and taken meeting by meeting.

Monetary policy has gone back to basics.^[1] Has it?

A return to basics does not mean a return to some idealised past, if there is such a thing in monetary policy.

As Edmund Burke once wrote, “A state without the means of some change is without the means of its conservation.”^[2]

The same holds for monetary policy. Today’s world poses challenges that require us to apply those basics in new ways and to innovate where our existing frameworks fall short.

Back to basics…

Several factors have made the return to basics possible.

The first is how the world has changed.

Interest rates have moved away from the effective lower bound, driven in part by structural pressures that include rising defence spending. And the shocks of this era are more likely to fall on the supply side than the demand side. Because these negative supply shocks have tended to push prices upwards, interest rates have moved away from the effective lower bound.^[3]

But the shift also reflects, perhaps more fundamentally, the policy framework Europe has built in response to those crises. By making the economy more resilient to shocks, this framework has reduced the need for unconventional or forceful policy responses.

The ECB’s own instruments have reduced fragmentation risks, including the Transmission Protection Instrument. These tools make it less likely that we observe unwarranted movements in sovereign spreads.

They also mean that we can raise rates to address inflation without the concern that tightening itself becomes a source of financial stress.

In addition, the strengthening of the European institutional architecture has weakened fragmentation by tackling the bank-sovereign nexus from both sides.

European banking supervision and the European resolution framework have made the banking sector more resilient, so that shocks are less easily amplified by the banking system – though we need to remain mindful that financial stability challenges may be building in non-bank financial intermediation, where oversight has not kept pace.

European fiscal frameworks have also developed considerably, from the European Stability Mechanism to Next Generation EU and other common borrowing instruments, weakening the nexus from the sovereign side.

At the same time, there are reasons to believe that European policy responses are also reducing how far shocks pass through to the real economy.

Our strategy assessment found that the anchoring of inflation expectations has moved closer to 2%, reflecting the ECB’s clear, symmetric target and its track record in fighting both too-low and too-high inflation.^[4] That is critical for insulating the economy from undue second-round effects of imported energy shocks.

The clean energy transition is also beginning to alter how those shocks are transmitted to the broader economy. In countries with higher shares of low-carbon electricity, like Portugal and Spain, wholesale electricity prices have increasingly decoupled from gas prices.

This resilience has been clearly visible in recent years.

The failure of Silicon Valley Bank did not destabilise euro area banks. The euro area has also weathered the largest US tariff increase in almost a century as well as what the International Energy Agency has called the largest oil supply disruption in history.

The costs have been substantial, but the economy has not been derailed. Cyclical fluctuations have remained contained, even if some of these shocks do pose challenges for Europe’s long-term growth outlook.

That resilience has allowed monetary policy to focus more squarely on its core job: stabilising prices through interest rates, without being constrained by fragmentation risks, banking sector vulnerabilities or the lower bound.

…but not back to the past

The world in which we apply these basics is fundamentally different from that which came before.

We face a charged geopolitical environment in which the frequency of major shocks looks to be rising. And these shocks are also taking on new forms: market access, energy supplies and critical minerals are increasingly being weaponised.

Shocks of this kind have two features that challenge our standard analytical frameworks.

First, the economic effects of these shocks depend on strategic reactions that may not follow historical regularities. Last year’s imposition of higher US tariffs provides a vivid illustration.

Most economic models predicted that the euro would depreciate against the US dollar, driven by expectations of higher US rates and a smaller US trade deficit, and that uncertainty would weigh heavily on investment. Many observers expected the EU to retaliate, raising import costs.

But in practice, the euro appreciated sharply against the dollar, as investors re-evaluated America’s position in the global financial system.^[5] The EU did not retaliate, prioritising its strategic relationship with the United States over its commercial interests.

And European governments responded to the broader geopolitical shift with the largest increase in defence spending in decades, an endogenous response that partly offset the drag from trade.

The second feature of these shocks is their capacity to escalate sharply, but also to swiftly unwind. The war in the Middle East is a case in point.

The conflict has generated significant inflationary pressures. But at every stage, judgements about its length, depth and implications for the outlook have shifted.

Cycles of escalation, negotiation, announced agreements and reversals have moved oil markets rapidly, sometimes in a matter of days.

In March, oil prices surged to nearly USD 120 per barrel, and worst-case projections were far higher. Following last week’s interim peace agreement, prices have fallen back to around USD 73 per barrel, though the durability of this agreement is far from assured.

Taken together, the picture I have described pushes monetary policy into new terrain.

While we are more likely to face shocks that push inflation away from target, the resilience Europe has built means their effects on our economy are more contained.

We may therefore more often find ourselves in an intermediate zone, between shocks we can look through and those we must react to forcefully.^[6]

At the same time, they are harder to read and more likely to change course quickly. So a proper calibration of our policy response is essential.

We are meeting this challenge through innovation in two areas.

Grounding our decisions in the right indicators

The first is ensuring that we have indicators that are sufficiently concrete and responsive to support decision-making in this environment.

One view holds that, given the features of today’s shocks, monetary policy should put a greater weight on inflation expectations. Since we cannot offset supply disruptions directly, our decisions should be calibrated on keeping expectations anchored.

Inflation expectations are a key part of the data that we monitor, and will always remain so. Any signs of a de-anchoring in longer-term expectations will undoubtedly warrant a reaction. Faced with large and persistent shocks, it may also be appropriate to forcefully react before de-anchoring is visible.

But when we find ourselves in the intermediate zone I have described, relying on expectations to calibrate policy has drawbacks.

Stable longer-term expectations can potentially lead policymakers to delay responding to inflation that is already above target and being felt by households and firms, even when forecasts and incoming data would call for action.

Conversely, if policymakers act to pre-empt a future de-anchoring, there is no reliable way to gauge how far rates need to be raised, or to know after the fact whether a pre-emptive response was necessary or excessive.

But advances in the data we use, and in how we use them, now give us a sharper and more timely picture of what is happening in the economy, and a firmer basis on which to calibrate our decisions in the present environment.

First, we have done considerable work at the ECB since 2022 to understand how concrete, real-time data map into medium-term inflation, particularly through developing our battery of underlying inflation indicators. Tools such as the persistent and common component of inflation have well-established leading indicator properties.

Second, we have invested significantly in improving our projections. The projection errors during the 2022 inflation surge resulted in a switch to more granular forecasts for oil, gas and electricity, among other improvements.^[7] Projection errors since the outbreak of the war in the Middle East have been very small.

These projections give us a more complete medium-term picture, not only of the inflation outlook but of how it will respond to our policy changes. This helps to calibrate policy that is far better suited to the environment I have described.

And the two reinforce each other: we can continually cross-check our forecasts against incoming data to verify whether they remain on track, so that we do not end up relying on forecasts that are out of date.

This framework was central to our most recent monetary policy decision. Some have characterised our rate increase earlier this month as an “insurance hike”. That is not an accurate description.

We faced an outlook of rising headline and core inflation, and a projection that saw inflation returning to 2% only in the last quarter of 2027, which was itself conditional on monetary policy adjusting. Our analysis showed that holding interest rates constant would have left inflation north of 2% in 2027 and 2028.

This was a decision based on what we saw in front of us. And our ability to take it with confidence, in an environment of considerable uncertainty, is the product of years of investment in our data, our indicators and our projections.

Building robustness

But in an environment where shocks can change direction so quickly, it would not be wise to anchor our decisions too firmly to any single indicator or projection. The second innovation is in how we evaluate our decisions across different states of the world.

Since our strategy assessment last year, scenario analysis has become a core part of how we take decisions under heightened uncertainty.^[8] It allows us to test whether a policy decision holds across a range of plausible outcomes, and to identify in advance the conditions under which we would need to change course.

This was particularly useful at our most recent meeting. In addition to the adverse and severe scenarios that we had already prepared in March, we included a milder scenario in which energy prices turn out lower than currently envisaged.^[9]

We added this scenario precisely to capture the possibility that geopolitical shocks can unwind faster than expected, as we have seen with the Strait of Hormuz.

Our rate increase was justified under every scenario considered. It was, by design, a robust decision. And nothing we have observed since then has called this assessment into question. Energy futures prices remain within the range of the scenarios we have modelled.

Publishing these scenarios also contributes to robustness in another way. It helps the public track when we may be moving from one scenario to another. But to anticipate how we will respond, the public needs to understand our reaction function.

Here there is an important distinction between forward guidance, which we have set aside, and framework guidance.^[10]

Our rate decisions are guided by three criteria: the inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission. Because this reaction function is by now well understood by markets, they do not wait for us to act. They adjust financial conditions in response to new data on their own.

Monetary policy begins to take effect before we have made a decision. And that buys us time to assess how a shock is developing before we commit to a course of action, which is highly valuable in conditions of high uncertainty.

We have seen this play out over recent months.

When the energy shock from the Middle East conflict began to feed through to the inflation outlook, market rates started tightening in March, well before our decision in June. That allowed us to gather more data and calibrate our response with greater confidence than if we had felt compelled to act immediately.

In this case, the data came in broadly as expected and we raised interest rates. But we have also had situations where initial expectations were not validated.

In the weeks after the US tariff announcement in April 2025, for example, markets priced in substantially lower rates, with a terminal rate as low as 1.5%. Our framework guidance gave us the space to wait and see how the shock played out, which was ultimately different from what most observers initially anticipated. The easing cycle ended at 2%.

In times of uncertainty, forward guidance loses its value. But framework guidance becomes more valuable.

When markets understand how we will respond across different states of the world, they can begin adjusting before we need to act. And that allows us to take more robust decisions.

Conclusion

Let me conclude.

Over the past 15 years, an environment of extraordinary pressures has demanded unconventional responses.

Today, the environment for monetary policy has changed. Shocks fall more often on the supply side, and Europe has built considerable resilience in response to those difficult years.

This has created the space for monetary policy to go back to basics: stabilising inflation with policy rates as our primary tool, acting in a measured way, and taking decisions meeting by meeting.

Yet the world we now face is no less demanding, and we must continue to change with it. The basics have not changed. But what it takes to apply them has changed.

Thank you.