Overcoming myopia in the ECB's 2025 monetary policy strategy review

Jens van 't Klooster

Papers from Dezernat Zukunft - Institute for Macrofinance, Berlin

Abstract: The ECB's strategy is under review, and rightly so. Recent inflation shocks have exposed weaknesses in the ECB's current approach. It focuses too narrowly on medium-term inflation expectations and relies almost exclusively on interest rate adjustments. The strategy is blind to structural inflation risks. Supply-side disruptions, corporate pricing power, and climate-related shocks were key drivers of the 2022-23 inflation surge, yet these risks lie outside the ECB's analytical framework and time horizon. Rate hikes alone are a blunt and costly tool. The ECB's reactive approach left it with few options beyond raising rates, which did little to curb cost-push inflation at the source and risked undermining investment in long-term resilience, especially in clean energy. The ECB's framework can be updated. Though mindful of 1970s-style inflation and inspired by the Bundesbank's success in fighting it, the drafters of the ECB mandate recognised the uniqueness of these circumstances and deliberately gave the central bank the flexibility to adapt to new economic challenges. The 2025 review is a chance to do so. The ECB must equip itself to detect and address structural risks before they materialise - and coordinate more effectively with other EU policy tools to preserve price stability in turbulent times. This report makes three policy recommendations: 1. Broaden the time horizon of the ECB's strategy to include the long-term preconditions for price stability. 2. Create a third analytical pillar dedicated to long-term risks, including climate change, energy dependence, demographics, market power and geopolitical disruptions. 3. Embed monetary policy in a wider EU inflation governance framework that supports strategic coordination with fiscal, industrial and competition policies.

Keywords: Monetarypolicy; Inflation; ECB (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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