(Bloomberg) -- The European Central Bank must think hard about how it deals with risks and uncertainty in an era of more-volatile inflation and less clarity about monetary-policy transmission, President Christine Lagarde said.
“We should reflect on how our policy framework incorporates risk assessments,” she said Friday in a speech at the International Monetary Fund in Washington, referring to the ongoing review of the ECB’s policy strategy.
This exercise “provides an opportunity to consider how to balance the information from baseline forecasts with real-time information, how to make best use of alternative scenarios, and the importance of the medium-term orientation when faced with different types of shocks,” she said.
The ECB wants to present the results of the review, which follows the one that ended in 2021, in the second half of 2025. While it will be less wide-ranging this time around and the symmetric 2% inflation target isn’t up for discussion, it could still have significant implications.
Executive Board member Isabel Schnabel said back in April that the ECB should consider rethinking how it forecasts economic expansion and inflation to improve communication and respond rapidly to shocks, warning it may be risky to rely on a policy of publishing only baseline projections.
In her lecture, Lagarde said the pandemic, the war in Ukraine and the energy crisis “have changed the structure of the economy and posed a challenge for how we assess the impact of monetary policy.” More supply-side shocks are widely expected in the future.
Lagarde also highlighted the effects of global fragmentation and digitalization on monetary transmission, though reaffirmed the ECB’s review won’t discuss the 2% goal.
“If we enter an era where inflation is more volatile and monetary-policy transmission more uncertain, maintaining this deep anchor for price formation will be essential,” she said.
But the ECB must “reduce as much as possible the uncertainty created by these structural shifts,” Lagarde said. “As uncertainty will nonetheless remain high, we need to manage it better.”
--With assistance from Bastian Benrath-Wright.
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