(Bloomberg) -- The European Central Bank will soon commence the next review of its monetary-policy strategy, according to people familiar with the matter — a process that could shape future interest-rate actions and its response to crises.

The evaluation will be carried out together with the euro zone’s 20 national central banks and will most likely begin after the ECB’s summer break in August, the people said, asking not to be identified because talks are private and no final decisions have been taken. The Governing Council would like to present the results in the second half of 2025, they said.

The review will probably be shorter and less wide-ranging than the one that ended in 2021 – the first in almost two decades – the people said. But it may include discussions about future drivers of inflation and lessons from recent crises, and could therefore have significant implications.

A spokesperson for the ECB declined to comment.

The process is kicking off as the ECB ponders how quickly to loosen policy following an unprecedented run of rate hikes to contain record-high inflation. It began lowering borrowing costs this month, but has given no clear indication what it will do next.

Just a few months ago, in March, the ECB finished a 15-month review of its operational framework, which sets out how monetary policy is implemented. The outcome was a continuation of the current system for steering rates, with lenders getting more of a say over how much cash they need to function.

The 2021 strategy review resulted in a new definition of price stability — making it explicitly symmetric around a medium-term goal of 2%. The ECB flagged back then that another exercise could come in 2025.

To conclude the review next year, the process must start soon, the people said. The first steps are mainly preparatory — likely including decisions on work streams and working groups. Last time, 13 separate work lines examined key areas including inflation measurement, policy instruments and communication.

Once the working groups complete their analyses, there’ll be in-depth discussions in the relevant ECB committees and in the Governing Council.

Topics of Discussion

Topics for the latest exercise are still under discussion and nothing final is agreed. But they may include lessons from the recent episode of high inflation — not least since the last review was shaped by the pre-Covid experience of very low consumer price growth.

The ECB may also look into how it can best act amid more regular supply shocks, geopolitical uncertainty and structural issues like climate change, ageing populations and de-globalization.

Speaking Wednesday in Helsinki, Finland’s Olli Rehn dedicated a speech to the upcoming review, highlighting that the inflation target itself doesn’t require re-consideration.

“But we need to analyze inflation dynamics in the exceptional years – and the functioning of the strategy – in more depth,” he said. “Another focus of analysis should be the labor market, not least since it is closely linked to the apparent slowdown in productivity growth.”

Governing Council member Klaas Knot has emphasized a “desire to retain a sufficient degree of flexibility in the face of new and possibly more frequent shocks” in the future.

“Applying flexibility going forward could allow us to look through small deviations from our target, as long as we respond especially forcefully to larger deviations,” he said.

An assessment of the ECB’s toolbox — what works and what doesn’t — could also be on the agenda. This could imply taking stock of large-scale bond-buying programs, widely known as quantitative easing.

Executive Board member Isabel Schnabel said in a recent speech on the pros and cons of asset purchases that the ECB should use QE primarily in times of crisis, as the costs of doing so may be more pronounced than for other tools.

Speaking on Wednesday in Helsinki, Chief Economist Philip Lane also touched on bond buying and any potential fallout from unwinding them. 

“In order to assess the implications of QT, it is important to trace all the implications of the central bank balance sheet contraction for asset prices and credit in an encompassing framework and to take into account the relation between central bank liquidity and bank intermediation capacity,” he said.

The discussions may also touch on projections and communication. 

In an earlier speech, Schnabel argued that the ECB should consider rethinking how it forecasts economic growth and inflation to improve communication and respond rapidly to shocks – including urging investors to take a closer look at the scenarios the ECB currently produces.

Knot has said that “communicating more explicitly about the uncertainty surrounding our projections, for example in the form of scenarios or confidence bands, could help de-emphasize the single endpoint of the projection horizon” — listing this as one of the possible topics for the review.

--With assistance from Kati Pohjanpalo, Alexander Weber and Jana Randow.

(Updates with comment from Lane starting in 18th paragraph)

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