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it can stabilize inflation using policy rates as main tool

The ECB chief said the rates used now are no longer tied to the effective lower bound, reflecting a shift away from earlier unconventional measures.

Reported · Written up by our desk · Economy

In remarks at the ECB, Christine Lagarde said the euro area has moved from the era that required unconventional monetary tools toward a framework where policy rates can be used as the primary instrument to stabilize inflation.

Lagarde pointed to past pressures including the sovereign debt crisis, the pandemic demand collapse, and later a rapid tightening cycle after Russia cut off access to natural gas. She said those experiences led to expanded tools such as asset purchases, refinancing operations, and instruments intended to address fragmentation risks.

She added that current decisions are data dependent and made meeting by meeting, with less reliance on complex forward guidance. Lagarde said interest rates have moved away from the effective lower bound, supported in part by structural pressures like rising defense spending and by the policy framework that aims to reduce the need for forceful unconventional responses.

Lagarde also cited ECB measures to reduce fragmentation, including the Transmission Protection Instrument, saying they lower the likelihood of unwarranted movements in sovereign spreads and make it possible to raise rates to address inflation without the concern that tightening could become harmful.

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