Maintaining Stability Through Monetary Flexibility in an Uncertain Economy

Recent remarks by the Governor of the Banque de France highlight the delicate balance facing European monetary policymakers as inflation stabilizes near target levels but economic uncertainty persists. Despite successfully bringing euro area inflation back to 2%—with minimal impact on employment and growth—underlying vulnerabilities remain, including global trade tensions, volatile commodity prices, and evolving geopolitical risks.

The return to a so-called “2 and 2” equilibrium, where both inflation and interest rates hover around 2%, might suggest a return to monetary normality. However, the speech cautions against complacency, emphasizing that persistent external shocks—from unpredictable foreign policies to climate events and technological disruptions—could rapidly alter the economic landscape. Furthermore, fiscal policy is now constrained by past crises, while much-needed structural reforms to boost growth and productivity are lagging.

In this environment, the central bank’s approach must be both credible and agile. Agility, as defined here, does not mean abandoning predictability or acting hastily. Instead, policymakers are urged to clearly articulate how decisions will be made—focusing on medium-term outcomes rather than reacting impulsively to every data point. The “reaction function” centers on three elements: the inflation outlook, core inflation trends, and how policy changes are transmitted to the real economy. Recent experience shows that euro area monetary policy transmits efficiently but must remain vigilant to avoid either acting too slowly or too forcefully in the face of new shocks.

Key principles for future policy include rapid assessment using new data sources, symmetric and context-driven responses, and the willingness to act decisively when warranted. Recent projections suggest that risks of inflation falling below target are currently greater than overshooting, with a temporary uptick in future years due to anticipated climate policies. Additionally, a stronger euro has provided a disinflationary cushion against external shocks, though this effect alone is not enough to guarantee lasting stability.

Ultimately, the challenge for European central bankers is to reconcile the need for stability with the requirement for flexibility in a world marked by unpredictability. By maintaining a clear and responsive policy framework—rooted in both confidence and humility—policymakers aim not just to keep inflation in check, but to ensure the ongoing resilience of the euro area economy. This strategy of “monetary agility” is vital to navigating the complex challenges ahead and sustaining Europe’s economic and financial sovereignty.