Inflation is back and weighing once again on people’s everyday lives. Just as the euro area was putting the post-pandemic inflation surge behind it, new shocks have hit.
For monetary policy, this sequence of shocks poses challenges. It can affect the behaviour of households and firms, the formation of inflation expectations and, ultimately, the persistence of inflation.
The ECB has adapted to this shock-prone environment in two ways.
First, as of 2023 we have made our monetary policy framework more transparent by laying out our reaction function – that is, the factors that the Governing Council uses to determine the appropriate monetary policy stance: the inflation outlook and the risks surrounding it, the dynamics of underlying inflation and the strength of monetary policy transmission.
ECB President Lagarde has referred to this as “framework guidance”.
By clearly explaining what we are doing and why, we foster public trust in our commitment to maintaining price stability in an environment in which inflation has become more salient.