Note: This speech is to be delivered.
1 Introduction
Ladies and gentlemen,
I am delighted to be here in Tübingen delivering the 10th Bundesbank IAW Lecture. I want to extend my thanks to the Institute for Applied Economic Research and my colleagues from Stuttgart for organizing this event.
Let me begin with a quote.
“I acknowledge that our strategy is complex. However, we have to recognize that we live in a rather complex economic world (…). It would therefore be impossible for the Eurosystem to conduct a successful policy by mechanistically following a simple rule (…).”[1]
The individual who made this statement would have celebrated his 90th birthday today. It was Wim Duisenberg, the first President of the European Central Bank (ECB). Unfortunately, the Dutchman passed away in 2005 shortly after the end of his presidency.
He played a pivotal role in establishing the ECB’s reputation as a credible and stability-oriented central bank. This success was largely attributed to the ECB’s monetary policy strategy.
The original strategy was announced before the introduction of the euro in October 1998. After a first review in 2003, it took nearly two decades for the strategy to undergo a second review in 2021.
Given the challenges faced during this period – including the financial crisis, the sovereign debt crisis, and persistently low inflation – it is understandable that the review was delayed multiple times.
The 2021 review, when finally undertaken, was comprehensive and thorough. It not only addressed the inflation target and monetary policy instruments but also considered financial stability, climate change impacts, and communication strategies.
2 Monetary policy since the 2021 strategy review
2.1 The symmetric inflation target
Four years ago, the Governing Council introduced a revised strategy, with the symmetric inflation target being a key feature of this revision.
The new strategy replaced a complex and asymmetric formulation of the price stability objective. The previous definition included a quantitative target of keeping inflation «below, but close to, 2%» within the Harmonized Index of Consumer Prices (HICP). The revised strategy now aims for a symmetric target of 2% inflation over the medium term.
Additionally, the Governing Council confirmed the role of key interest rates as the primary policy tool and maintained other unconventional measures in the ECB’s toolkit, such as rate forward guidance, asset purchases, and longer-term refinancing operations.
The Council also expressed its intention to regularly review the monetary policy strategy, with the next assessment scheduled for 2025. Recently, the third update was concluded and published.[2]
The latest adjustments to the strategy were minimal, with the symmetric 2% inflation target over the medium term being reaffirmed. Any deviations from this target, whether positive or negative, are considered equally undesirable, and appropriate actions will be taken to address significant deviations.
This approach reflects lessons learned from recent years, where high inflation prevailed. The 2021 review, however, was conducted in response to persistently low inflation in preceding years.
2.2 The inflation surge and the monetary policy response
Inflation in the euro area has significantly increased over the past four years, surpassing the 2% mark and reaching levels unseen since the euro’s introduction. Following the Russian invasion of Ukraine, inflation rose to over 10% in 2022.
To address this post-pandemic surge in inflation, monetary policymakers altered their approach by ending asset purchases and raising key interest rates by 450 basis points across ten consecutive meetings.
These measures helped lower inflation and bring it back in line with the target, allowing for a gradual reduction in interest rates starting a year ago.
By June 2025, not only was the current inflation rate at 2%, but the Eurosystem’s new inflation forecast also indicated a return to target over the medium term.
The decisive monetary policy actions played a crucial role in anchoring inflation expectations, preventing a significant rise in medium-term inflation expectations. Effective communication of central bank decisions further helps in maintaining stable inflation expectations.
Recent research by Bundesbank suggests that clear communication from central banks can influence households’ inflation expectations and help anchor them towards the target.
The researchers conducted an experiment in the Bundesbank online consumer expectations survey, where different messages were presented to respondents to assess their impact on medium-term inflation expectations.
According to the study, providing information on inflation forecasts in percentage terms can influence expectations.
Using clear, positive language to explain the economic outlook helps to lower inflation expectations among households. Visual aids, like simple charts, are even more effective than words alone. Good communication plays a crucial role in monetary policy, although ultimately, it is the actions of the central bank that make the most impact.
Drawing from the lessons of the 1970s, we know that if expectations become unanchored, a stricter policy approach is necessary. Fortunately, we have been able to manage inflation more efficiently this time around, despite facing challenges like the pandemic, supply chain disruptions, and geopolitical tensions.
While economic growth in the euro area has been sluggish, a recession has been avoided so far. The outlook suggests gradual improvement in the coming years, with inflation expected to remain around 2%. Uncertainty remains high, but experts predict stability in inflation rates over the medium term.
In the face of potential risks, such as trade conflicts and tariff escalations, the ECB must remain cautious and adapt its decisions based on data. Services inflation remains a concern, but recent trends indicate a decrease in price pressures. The current interest rate is at a neutral level, suggesting that monetary policy is well-positioned to respond to future developments effectively. Committing to a specific interest rate path, envisioning a further step, or ruling it out would not be prudent. The 2025 strategy assessment highlighted the need for flexibility in utilizing monetary policy tools, such as forward guidance and asset purchases. It was observed that rigid commitments can be detrimental when circumstances change rapidly. Moving forward, a more flexible approach to forward guidance and asset purchases will be adopted, taking into account state-dependent conditions and potential diminishing effectiveness. Additionally, lessons learned from past experiences, such as balance sheet risks and the need for forceful or persistent policy responses, will guide future monetary policy decisions. Ultimately, the goal is to maintain price stability in the face of increasing complexity and uncertainty in the global economy. Ist es nun an der Wirtschaft, ein Revival der 1970er Jahre zu erleben? Politico, 25. Juni.
Nagel, J. (2024), Was können wir aus der jüngsten Desinflationsphase lernen? Abendessenrede auf der Jahreskonferenz des CEBRA, 29. August.
Deutsche Bundesbank (2025), Die potenziellen Auswirkungen einer restriktiveren US-Handelspolitik auf die deutsche Wirtschaft, Monatsbericht Juni, zusätzliche Informationen.
Siehe Brand, C., N. Lisack und F. Mazelis (2025), Natürliche Ratenabschätzungen für den Euroraum: Erkenntnisse, Unsicherheiten und Schwächen, ECB Economic Bulletin, 1/2025.
Nagel, J. (2025), Eröffnungsstatement auf der Pressekonferenz zur Vorstellung des Jahresberichts, 25. Februar.
Europäische Zentralbank (2021), Die geldpolitische Strategieerklärung der EZB. In simpler terms, if we hadn’t taken quick action, inflation expectations could have gone up, causing a delay in reaching our target. Central bank actions and clear communication play a key role in keeping inflation expectations stable. Recent research shows that using simple language and visuals can effectively reduce inflation expectations. While good communication is important, central bank action ultimately determines the success of monetary policy. Despite recent economic challenges, growth is expected to improve gradually. Inflation is currently at a manageable level, but uncertainties remain. It is crucial for central banks to make informed decisions based on data and be prepared for different scenarios. Services inflation, in particular, requires careful monitoring. Fortunately, there has been a significant easing of price pressures in recent months. The latest data on wage developments suggest that price pressures in the services sector are expected to decrease further.
The current key interest rate is at 2%, which aligns with the natural rate of interest calculated by Eurosystem experts. This indicates that the current monetary policy is neither tightening nor stimulating the economy.
While it is important to remain flexible in responding to further developments, committing to a specific interest rate path or ruling out any future steps would be unwise. It is crucial to be prepared for potential changes in economic conditions.
Looking back at the past few years, it is clear that forward guidance and asset purchases need to be used more flexibly. State-dependent forward guidance and a more robust approach to forecast errors are essential for effective monetary policy.
In terms of large-scale asset purchases, a more flexible approach should be adopted to account for diminishing effectiveness over time. It is important to be able to react swiftly to changes in the inflationary outlook.
Despite facing balance sheet losses due to large-scale asset purchases in the past, the Eurosystem remains financially sound. Moving forward, it is crucial to consider large-scale asset purchases as the exception rather than the rule.
In conclusion, maintaining price stability remains a challenging task, especially considering various structural developments. However, with a credible commitment, transparent communication, and a clear strategy, the Eurosystem can navigate these challenges successfully. The strategy assessment of 2025 has equipped the Eurosystem to address the complexities of the current economic landscape, and the Governing Council is dedicated to clear and transparent communication to ensure understanding among markets and the public. En este sentido, espero sinceramente haberme expresado de manera clara y comprensible el día de hoy.
Espero con interés la discusión con ustedes y les agradezco su atención.
Referencias:
1. Duisenberg, W. (1999), Declaración Introductoria en el Congreso Bancario Europeo de Frankfurt, Sesión I: «¿Necesitan los mercados orientación?», Frankfurt am Main, 19 de noviembre.
2. Banco Central Europeo (2025), Declaración de estrategia de política monetaria del BCE.
3. Banco Central Europeo (2025), Informe sobre herramientas de política monetaria, estrategia y comunicación, Grupo de Trabajo 2: Herramientas de Política Monetaria, Estrategia y Comunicación, Documento Ocasional del BCE, Nº 372.
4. Hoffmann, M., E. Moench, L. Pavlova, G. Schultefrankenfeld (2025), Un KISS para la comunicación de los bancos centrales en tiempos de alta inflación, Documento de Discusión del Bundesbank, 12/2025.
5. Nagel, J. (2022), La reedición de la estanflación se puede prevenir con una política inteligente. ¿Es ahora el turno de la economía de experimentar un resurgimiento de los años 70? Politico, 25 de junio.
6. Nagel, J. (2024), ¿Qué podemos aprender del reciente episodio de desinflación? Discurso de cena en la Conferencia Anual de CEBRA, 29 de agosto.
7. Deutsche Bundesbank (2025), El impacto potencial de una política comercial más restrictiva de EE. UU. en la economía alemana, Informe Mensual de junio, información complementaria.
8. Ver Brand, C., N. Lisack y F. Mazelis (2025), Estimaciones de la tasa natural para la zona del euro: ideas, incertidumbres y deficiencias, Boletín Económico del BCE, 1/2025.
9. Nagel, J. (2025), Declaración introductoria en la conferencia de prensa de presentación del Informe Anual, 25 de febrero.
10. Banco Central Europeo (2021), Declaración de estrategia de política monetaria del BCE. In contrast, the 2021 strategy review was conducted with the backdrop of persistently low inflation in previous years. By 2027, the overall loss in real GDP growth could reach up to 1.5 percentage points due to various factors impacting inflation. While retaliatory import tariffs may lead to price pressure, weaker economic activity in Germany could dampen inflation. Additionally, a decline in oil prices driven by global growth could contribute to lower consumer price increases, resulting in a slightly lower inflation rate compared to the baseline scenario. The uncertainty stemming from the ongoing trade conflict underscores the need for a cautious approach, with the ECB Governing Council advised to make data-dependent decisions on a meeting-by-meeting basis. Flexibility in monetary policy tools, such as forward guidance and asset purchases, is crucial to respond effectively to changing economic conditions. The experiences of the past years highlight the importance of adapting monetary policy measures to address both low and high inflation risks. Maintaining a sound balance sheet amidst potential losses from large-scale asset purchases is essential for ensuring price stability. Overall, a balanced and flexible approach to monetary policy is necessary to navigate the current economic environment. It is now crucial to achieve sustainable stability in inflation at 2%. However, we must be prepared for increased volatility in price developments. There is a concern that heightened uncertainty may become the new norm, with various structural factors indicating that price pressures will remain high in the medium term.
Maintaining price stability will continue to be a challenging task, but with a credible commitment to its mandate, transparent communication, and a clear strategy, the Eurosystem can overcome this challenge. As Wim Duisenberg once said, our strategy may be complex, but it is necessary in the complex world we live in.
Looking ahead to the strategy assessment of 2025, the Eurosystem is well-equipped to tackle the challenges of our time, drawing from the lessons learned over the past decade. The Governing Council is dedicated to clear and transparent communication to ensure that its actions are well understood by markets and the public. I hope that I have expressed myself clearly and comprehensively today.
I look forward to the discussion and thank you for your attention. Please provide me with an alternative version. Can you please rewrite this sentence?
QUELLEN
