ECB Urges Steady Policy Amid Volatile Global Environment

As the global economy grapples with lingering inflationary pressures and unprecedented shocks, a leading member of the European Central Bank’s Executive Board has outlined the logic behind the ECB’s current “steady hand” approach to monetary policy. The speech, delivered at a major monetary policy conference, emphasized the importance of focusing on medium-term risks to price stability rather than reacting to every short-term fluctuation in economic data.

The ECB’s thinking is grounded in lessons from the past two decades, particularly around the behaviour of the Phillips curve—the fundamental relationship between inflation and economic activity. While this relationship proved unpredictable in the years following the global financial crisis, with inflation not falling or rising as much as models predicted, the post-pandemic period saw inflation respond much more sharply to economic slack, making policy more challenging to calibrate. Now, with inflation data suggesting the Phillips curve may again be flattening, the ECB sees little justification for major changes in interest rates unless new evidence emerges.

Central to its current stance are two key risks: expansionary fiscal policies across the euro area, particularly in Germany and through EU-wide defense and infrastructure spending, and the global consequences of rising trade barriers. Both forces, the ECB contends, could reinforce upward pressure on inflation over the medium term, especially if retaliatory tariffs disrupt global supply chains and drive up costs. However, despite these potential headwinds, the speech argued that the euro area’s position as a global supplier of highly differentiated goods, combined with stable long-term inflation expectations, should help cushion the blow.

The ECB’s data-driven but forward-looking approach is designed to avoid overreacting to temporary dips in inflation or to the volatility stemming from trade conflicts and currency movements. Instead, keeping rates in neutral territory allows time to assess whether fiscal expansion or supply shocks will generate sustained inflationary pressure. Likewise, while a recent rise in short-term inflation expectations among households has been noted, the ECB sees no immediate risk of these expectations becoming unanchored—a key trigger for more forceful action in the past.

The significance of this strategy lies in its balance: by maintaining rates rather than stimulating or constraining the economy, the ECB aims to safeguard price stability without jeopardizing growth or labor markets in a period marked by high uncertainty and structural change.