(Il testo seguente è tratto integralmente dalla nota stampa inviata all’Agenzia Opinione) –
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Playing the long game:
how should monetary policy adapt to the Great Reconfiguration?
Speech by Fabio Panetta Governor of Banca d’Italia
Closing Conference of the ESCB Research Network on Challenges for Monetary Policy Transmission in a Changing World (ChaMP).
1. Introduction
When we launched this research network in 2024, I described the previous four years as exceptional: a period marked by ‘a combination of shocks and structural changes with few historical precedents’.1 Looking back, that assessment seems almost cautious.
What first appeared as a sequence of extraordinary events has become a defining feature of the global economy. Geopolitical tensions, trade fragmentation and technological disruption are no longer merely temporary disturbances. They are forces that continuously reshape the environment in which households, firms and policymakers operate. They generate uncertainty that is not only high, but persistent.
For central banks, these forces pose a common challenge. They are difficult to classify as sources of pure supply or demand shocks. They affect the supply side through energy prices, production costs, trade flows and critical inputs. But they also influence demand through income, confidence, consumption and investment.
More importantly, they can alter structural relations in the economy, including the transmission of monetary policy itself.
This environment requires more than a recalibration of the policy stance. It calls for a periodic review of how we examine the inflation outlook, assess the stance and adjust the reaction function.
The ECB’s 2025 strategy review was an important step in this direction as it addressed many of the issues we confront today. We must continue to refine our analytical framework while preserving the clarity of our mandate: price stability.
Today I will focus on three themes. How should monetary policy respond to large energy shocks that simultaneously trigger inflationary and recessionary forces? How do structural transformations affect the outlook and the transmission of monetary policy? And what do they imply for the way central banks take decisions under uncertainty?
I will provide a few reflections, trusting that the research community will continue to address these questions in the future.
2. The economic outlook in the euro area
In 2025, the euro area faced higher US tariffs, stronger competition from China and a sharp rise in uncertainty.2 The economy proved more resilient than expected. Real GDP grew by 1.4 per cent.3 Domestic demand more than offset the decline in net exports. High employment supported consumption, while defence spending and investment in the digital and green transitions sustained capital formation. A less restrictive monetary stance supported both households and firms.
Inflation completed its return to target amid lower demand and cost pressures, rising tariffs and the disinflationary impulse coming from China.
This was a positive outcome. But it should be interpreted with caution.
First, European households continued to save more than before the pandemic. This suggests that uncertainty remains a significant drag on activity: households consume less because they are bracing for a more uncertain future.
Second, industrial production stagnated in the second half of the year. Competition from China, increasingly visible in high-technology sectors, weighed heavily on manufacturing economies such as Germany and Italy.4 If this weakness discourages investment, it may affect not only current activity, but also the euro area’s longer-term growth potential.
The outlook deteriorated significantly with the outbreak of the war in the Persian Gulf. Input costs and selling prices increased (Figure 1.a); short-term inflation expectations moved up (Figure 1.b). At the same time, consumer confidence fell sharply (Figure 2.a) and expected activity in services declined (Figure 2.b).5 Financial conditions also tightened: banks reported more restrictive lending standards,6 while bond yields and sovereign spreads rose.
The euro area faced a difficult combination: renewed inflationary pressures from commodity prices and supply chains, together with weaker confidence and demand prospects. This is precisely the environment in which monetary policy becomes more complex.
3. Dealing with the energy shock
How should the ECB deal with the energy crisis and its aftermath? Two simple answers lie at the extremes of the debate. Both are misleading.
The first is that central banks should simply ‘look through’ temporary supply shocks. This view underestimates the scale and possible persistence of the current shock. The hit to global energy supply has been large. Damage to production and transport infrastructure could affect prices even if the conflict subsides. The governance of the Strait of Hormuz – a critical chokepoint not only for oil and gas, but also for fertilizers, aluminium, and other industrial inputs – remains uncertain.
This is reflected in incipient strains on supply chai Monetary policy cannot prevent higher energy prices from spreading through the economy. But it must prevent this process from becoming embedded in the expectations and decisions of firms and workers. Once a shock turns into a broader inflationary spiral, the cost of restoring price stability becomes materially higher.
The second misleading answer is that the current episode is a replay of the dramatic spike in energy prices of 2022, and that the ECB should therefore react forcefully, as it did then, to prevent inflation from becoming entrenched.
But this is not a replay of 2022. Demand is weaker. Real interest rates are higher (Figure 4). The shock has affected oil prices more than gas prices; this matters because oil prices tend to generate weaker and less persistent inflationary effects than gas prices.7 The euro area economy has also changed: its capacity to import liquefied natural gas has increased, allowing for greater diversification of suppliers; the share of renewables in electricity generation has risen. These developments have reduced – though not eliminated – the euro area’s vulnerability to energy shocks.
The ECB must navigate between these two extremes. It must neither dismiss the shock as temporary nor respond as if the economy were in the same position as four years ago.
3.1. Large shocks ‘travel fast’, but they also squeeze spending …
Faced with large cost shocks, firms tend to raise selling prices more quickly in order to protect margins, especially when their competitors are affected by the same shock.8 The frictions that make inflation sluggish in normal times may become less relevant after a large increase in costs.
This mechanism may have strengthened in recent years. After the inflation surge of 2021-22, firms have paid closer attention to their pricing strategies; furthermore, digital tools allow prices to be adjusted with far greater speed than in the past.9
Households may also update their inflation expectations more rapidly when they have recently experienced high inflation.10
These forces suggest that the first-round effects of a large energy shock can pass through to prices relatively quickly.
But this is only half of the story.
Large energy shocks also depress demand. They reduce households’ purchasing power, compress firms’ margins, worsen income prospects and increase uncertainty. Consumers may cut discretionary spending; firms may postpone investment. The result is a downward shift in aggregate demand, which has a negative effect on inflation.
3.2. … with complex implications for monetary policy
This dual nature makes these shocks especially difficult for monetary policy. They raise inflation through costs and lower it through demand. Their net effects depend on the relative strength and persistence of these channels.
This is why central banks must look beyond the immediate price increases. They must assess whether the shock is likely to trigger second-round effects, whether expectations remain anchored, and to what extent weaker demand will contain inflationary pressures over the medium term.
How has this approach been applied in practice? In June, the ECB Governing Council raised the deposit facility rate by 25 basis points. The decision reflected three considerations.
First, the Eurosystem staff projections pointed to a deterioration in the inflation outlook. Inflation was projected to rise to 3.0 per cent in 2026 and to return to target in the second half of 2027. Second, inflation risks were tilted to the upside, partly owing to the continued closure of the Strait of Hormuz. Third, the recalibration was aimed at preserving the anchoring of medium-term inflation expectations, a crucial condition for containing indirect and second-round effects.
Importantly, the decision to raise rates was judged to be robust across a range of scenarios. This reflects a key principle of policy making under uncertainty.11
The ongoing negotiations between the United States and Iran may lead to lower energy prices than assumed in the June baseline projections. But the outlook remains fragile. Upside risks to inflation continue to coexist with downside risks to growth. This requires constant monitoring of geopolitical developments, energy markets, supply chains, wages and inflation expectations. It also requires that monetary policy avoid committing to a predetermined path.
4. The Great Reconfiguration: challenges for monetary policy
So far, I have focused on the energy shock and its implications for monetary policy. But this shock is not an isolated event.
Geopolitical fragmentation, artificial intelligence and digital finance, population ageing and climate change are reshaping the environment in which households, firms and policymakers operate (Figure 5). After the Great Moderation, the world has entered what we may call a ‘Great Reconfiguration’.
Structural change is not new. What is distinctive today is the simultaneous occurrence of several major transitions. Historical comparisons should be used with caution – especially by non-historians – but one parallel may provide useful insights: the period at the turn of the twentieth century that was to be known in Europe as the Belle Époque. It was a period of remarkable technological innovation, economic progress, trade expansion and financial integration. But it was also marked by large inequalities, geopolitical rivalries.
and an arms race – as well as being the apex of European imperialism.12 Beneath a surface of prosperity, tensions were building.
I do not want to push the parallel too far. It merely serves to illustrate that structural change does not necessarily unfold smoothly. Technological progress does not automatically produce stability. Economic integration does not by itself prevent fragmentation. And unresolved tensions can eventually lead to severe disruption.
Central banks are not the main actors in addressing these tensions. But they must understand how structural forces affect the economy and the transmission of monetary policy. The channels through which technology, demographics, climate change and geopolitics may impact growth and inflation are reasonably well understood.13 But the scale and timing of these effects are not.
In this context, the Great Reconfiguration raises three specific questions for monetary policy. How does the interaction of these structural forces affect the way we assess the macroeconomic outlook? How will monetary policy transmission change? How should the reaction function adapt? Let me consider each question in turn.
4.1. What happens when the trends collide?
Structural trends do not operate in isolation. Their effects may reinforce or offset each other.14
Consider AI. Some forces may amplify its macroeconomic impact. AI requires large amounts of energy and water. Therefore, it has important complementarities with the green transition. Expanding the supply of clean and affordable energy, and improving the management of natural resources, would support the development of more powerful AI systems. In turn, AI can improve energy efficiency, optimize water use and accelerate innovation in clean technologies.
Other forces may hold it back. Geopolitical fragmentation could restrict access to critical inputs, data and digital infrastructure. Ageing could reduce the supply of skills needed to adopt and use new technologies effectively.
These interactions create additional uncertainty around the ultimate impact of AI on productivity, inflation and growth.
They also complicate one of the most important tasks of macroeconomic analysis: distinguishing structural change from cyclical fluctuations. Identifying a single structural shift in real time is difficult. Identifying several shifts at once, while they interact with one another, is even harder.15
The Great.
4.2. How will the transmission mechanism evolve?
The second question concerns the transmission of monetary policy. Structural changes are likely to alter some of the channels through which monetary policy affects the economy.16 But the direction of these effects is not obvious.
Some forces may strengthen the transmission. AI can help firms process information on costs and demand more rapidly, allowing them to adjust prices more frequently. Inflation may therefore react more quickly and sharply to changes in financing conditions.17
Digital banking might work in a similar direction. Digital tools make it easier for depositors to compare rates and move their funds across banks. If this intensifies the competition for deposits, the pass-through from policy rates to deposit rates should become faster and stronger.18
Other forces may weaken the transmission. Ageing is one example. In societies where pensioners account for a large share of the population, household spending may depend less on interest-sensitive decisions, such as buying homes or durable goods.19 Ageing may also interact with digitalization: digital tools reduce search and switching costs, but their impact may be smaller if older households are less inclined to use them.
Geopolitical fragmentation may also weaken the link between investment and interest rates. Firms and governments may invest more in resilience: diversifying suppliers, strengthening cyber security or holding larger inventories. When these decisions are driven by long-term strategic considerations, they may be less responsive to financing costs.
These examples point to a broader conclusion: structural change can make monetary policy transmission less predictable. The same change in policy rates may have different effects depending on the structure of the financial system, the age profile of the population, the degree of digitalization and the geopolitical environment.
This means that the transmission mechanism must be continuously reassessed.
4.3. Does monetary policy need a new playbook?
The third question concerns the reaction function.20
Structural change complicates the assessment of the monetary policy stance. This assessment typically relies on estimates of the equilibrium interest rate, or r-star. But the forces at play today push r-star in different directions. Demographics tend to reduce it, while artificial intelligence and fragmentation may operate through opposing channels. The net effect is uncertain.21
The difficulties do not end there.
If structural change alters the transmission mechanism, it becomes harder to calibrate the appropriate response to shocks. A policy adjustment that would have had predictable effects in the past may now operate differently.
Structural change could also modify the nature and the distribution of the financial stability risks confronted by monetary authorities.
In this environment, robustness becomes even more important.
Central banks should continue to use central projections, but they may have to rely more systematically on alternative scenarios and sensitivity analysis. They should test policy choices against different assumptions about energy prices, supply chains, productivity, financial conditions and expectations.
5. Conclusions
Let me conclude.
Supply shocks are an old challenge for monetary policy. Today, however, they are becoming more frequent, more persistent and more closely intertwined with the structural transformations of the global economy.
In this fluid environment, central banks must keep improving the way they interpret shocks, assess transmission and take decisions under uncertainty. Monetary policy must adapt to a changing economy.
This requires investing in new forms of knowledge. During the pandemic, epidemiology became part of the policy conversation. Today, computer science, political science, climate science and energy economics are increasingly part of the toolkit of central banks.
This applies even more to research. The ChaMP network took this challenge seriously from the start. It was established to study the ‘challenges for monetary policy transmission in a changing world’. That world is changing faster than expected.
I am sure the network has laid the foundations for partnerships that will continue to bear fruit in the years ahead. Many of these partnerships will be interdisciplinary. Economists and non-economists will need to work together to understand a future that remains uncertain, but is rapidly approaching.
As central bankers, playing the long game means keeping our mandate firmly in sight while adapting our analysis to the world in which that mandate must be delivered.
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