ContextIntroductory speech by Christine Lagarde at the ECB Forum on Central Banking 2026 in Sintra, Portugal.
Why it mattersThe opening speech of Sintra, the ECB's main yearly conference, explaining how it now sets rates without committing in advance.
- The euro area went through 15 years of extraordinary pressures.
- Risks may build in non-bank finance, where oversight lags.
- The Middle East energy shock pushes up the inflation outlook.
- Set rates by the inflation outlook, underlying inflation and transmission.
- Use framework guidance rather than forward guidance.
- Take time to assess shocks before committing to a course.
Read the speech summary
1. Why policy can go back to basics
Opening the ECB Forum in Sintra, Christine Lagarde said that after fifteen years of unconventional measures, from asset purchases to elaborate forward guidance and the fastest tightening in the ECB's history, monetary policy can now rely on policy rates as the main tool, with measured moves and meeting-by-meeting, data-dependent decisions. She cautioned that this is no return to an idealised past. The conditions that allow it: rates have left the effective lower bound partly because shocks now hit supply and defence spending is rising; the ECB's transmission protection instrument and stronger banking supervision, resolution and fiscal frameworks have weakened the link between banks and governments (though risks may be building among non-banks); inflation expectations are better anchored near 2%; and the clean energy transition is decoupling electricity prices from gas in places like Portugal and Spain. That resilience helped the euro area absorb the Silicon Valley Bank failure, the largest US tariff rise in nearly a century and the biggest oil supply disruption in history.
2. A harder world to read
Shocks are becoming more frequent and are taking new forms, with market access, energy and critical minerals used as weapons. Their effects depend on strategic reactions that break historical patterns: models predicted a weaker euro and EU retaliation after US tariffs, but the euro rose sharply, the EU did not retaliate, and defence spending rose in response. Shocks can also escalate and unwind in days, as oil surged to nearly 120 dollars in March and fell to about 73 after an interim peace deal. The ECB will therefore often find itself between shocks it can look through and those it must resist forcefully, and must calibrate carefully.
3. Better indicators and robust decisions
She argued against leaning mainly on inflation expectations in that middle zone: stable expectations may delay a response to inflation households already feel, while pre-empting de-anchoring offers no guide to how far to go. Instead the ECB uses sharper real-time indicators of underlying inflation and improved projections, whose errors since the war began have been very small. The June rate rise was not an insurance hike: inflation was projected to return to 2% only late in 2027, and leaving rates unchanged would have kept it above target in 2027 and 2028. Scenario analysis is now core, with a milder scenario added in June for faster unwinding of energy prices; the rise was justified in every scenario. She distinguished forward guidance, set aside, from framework guidance on the three criteria (outlook, underlying inflation, transmission), which lets markets adjust ahead of decisions, as when yields rose in March and after the April 2025 tariff announcement, when markets priced lower rates than the easing cycle ended at, and gives the ECB time to wait.