2025-07-21
ECB strategy review in 2025: How to maintain price stability in a volatile world?
Recent inflation fluctuations from a historically very low level to the level temporarily above 10% in the euro area have shown how quickly and strongly the economic environment can change. These fluctuations have inevitably been even larger in the small open economy of Lithuania. In the light of the changed economic environment and new experience gained, the Governing Council of the European Central Bank (ECB) adopted an updated monetary policy strategy on 30 June 2025. While the main 2% inflation target in the euro area over the medium term remains unchanged, the updated strategy puts more emphasis on flexibility and ability to respond swiftly to unexpected developments.
Gediminas Šimkus, Chair of the Board of Lietuvos bankas
Inflation in 2022–2023
The ECB last updated its monetary policy strategy in 2021. Since then, we have experienced significant shocks and changes. One of these is the sharp and very significant rise in inflation in the euro area in 2022–2023. This was driven by several important factors. First, the surge in energy prices due to russia’s war against Ukraine. Supply chain disruptions during the pandemic have hampered the availability of goods and raw materials for longer than previously expected and contributed to the overall rise in prices. The rebound in consumption following the COVID-19 restrictions also added to the upward pressure on prices. Another important factor was the historically low unemployment rate which led to the faster growth of wages, including wage expectations. All these circumstances created an unprecedented surge in prices and prompted the Governing Council of the ECB to take decisive monetary policy action to restore price stability.
Commitment to the 2% inflation target
The Governing Council of the ECB has confirmed that its inflation target over the medium term remains at 2%. The revised strategy emphasises that the target is symmetric, meaning that both too high and too low inflation is equally unacceptable. While short-term deviations from this target are inevitable, it is important that inflation returns to the desired level over the medium term which requires keeping long-term inflation expectations anchored.
The new strategy recognises that the inflation environment has become more volatile in recent years, with underlying factors pulling in both directions. An ageing society, deglobalisation, changing geopolitical environment, digitalisation, unexpected supply disruptions or climate change could cause or amplify inflation deviations from the target. A flexible and adaptive monetary policy is therefore needed to ensure that this volatility does not affect long-term inflation expectations. For instance, following the surge in inflation in 2022–2023, the Governing Council of the ECB responded with a series of decisive and consistent interest rate hikes, raising them by 4.5 percentage points in just over a year, one of the sharpest interest rate hikes in history.
Interest rates remain the main tool of the ECB
The Governing Council of the ECB continues to emphasise that the ECB’s interest rates remain the main monetary policy instrument. Additional measures, such as asset purchase programmes, long-term loans to banks, negative interest rates or forward guidance, can also be used if necessary. Additional measures help to ensure the effectiveness of monetary policy in an environment of low interest rates and elevated financial market tensions. It is also important that the ECB is committed to carefully assessing the adequacy, impact and possible side effects of these non-standard measures in advance.
Responding to uncertainty and risks
The significant increase in economic, geopolitical, and climate uncertainty in recent years shows that standard macroeconomic projections alone are no longer sufficient. Therefore, alternative scenarios and sensitivity analysis are becoming particularly important. The Governing Council of the ECB aims to rely on the analysis covering a wide range of risks, which helps to better anticipate and understand possible inflation paths and respond adequately to unexpected developments.
Should risks to price stability arise, the Governing Council of the ECB would respond to any significant deviation of inflation from its target in either direction by taking decisive monetary policy action to prevent the inflation deviation from becoming prolonged or sustained and keep long-term inflation expectations anchored.
The Governing Council of the ECB will aim to ensure the sustainability of monetary policy and avoid side effects on the ECB’s financial performance.
Why is this important for Lithuania?
Although the seat of the ECB is in Frankfurt, the Governing Council’s decisions are taken by consensus at the euro area level and Lietuvos bankas is a full member of the Eurosystem. The decisions of the Governing Council of the ECB on interest rates directly affect Lithuanian consumer spending, lending conditions, housing prices and the overall state of the economy. The more effective and flexible the ECB’s decisions are for the entire euro area, the better the conditions for businesses and households in Lithuania.
The review of the ECB’s strategy in 2025 is not a revolution, but it is a clear sign that the ECB is learning from the past, monitoring the present and preparing for the future. The objective remains the same: 2% inflation over the medium term and a sound economic environment. Price stability is important for people who plan, save, invest or take out loans, in other words, for all of us. The next strategy assessment is scheduled for 2030.