Monetary policy must be reliable, but it must not overly restrict its flexibility, Bundesbank President Joachim Nagel said at the 10th Bundesbank IAW Lecture in Tübingen.

In his speech, Nagel addressed the ECB’s original monetary policy strategy, which has undergone significant reviews. The most notable of these was in 2021, when the ECB introduced a symmetric 2 % inflation target – treating both upward and downward deviations as equally undesirable.

This approach replaced the previous less clear target and reaffirmed the use of key interest rates as the main policy tool while retaining unconventional measures such as asset purchases and forward guidance. 

Nagel described the ECB’s response to the recent inflation surge, which saw euro area inflation rise following the pandemic and the war in Ukraine. The ECB countered this with interest rate hikes and the cessation of asset purchases, successfully bringing inflation back to the 2 % target by mid-2025. He emphasized the importance of clear central bank communication in anchoring inflation expectations, noting that both the content and presentation of messages can influence public perceptions.

According to Nagel, the ECB’s most recent strategy review in 2025 made only minor adjustments by reaffirming the symmetric inflation target and emphasizing the need for flexibility and scenario analysis in the face of heightened uncertainty.

In general, our monetary policy should use all its instruments more flexibly to adjust its course when macroeconomic conditions change, he said.

The Bundesbank President concluded that while the recent return to price stability is encouraging, ongoing structural challenges – such as demographic shifts, climate change, and geopolitical fragmentation – mean that maintaining price stability will remain difficult. However, with a credible commitment to its mandate, transparent communication and a clear strategy, the Eurosystem can master this challenge, Nagel added.