Author: admin

On September 30, 2025, the Supreme People’s Court (SPC) released the Interpretation of the Supreme People’s Court on Several Issues Concerning the Implementation of the Company Law (the “draft judicial interpretation”). This 90-article draft consolidates and revises the Provisions on the Implementation of the Company Law (I)–(V), forming the first comprehensive systematic update to China’s Company Law judicial interpretations since their gradual introduction beginning in 2006. 

This article is the third in our series on the draft judicial interpretation. It examines two major parts of the document: nominee shareholders and the protection of investor rights, including issues of actual investors, disclosure, defective capital contributions, and enforcement and equity transfers and preemptive rights, including acquisition of equity, conflicting transfers, the legal effect of the shareholder register, and the exercise of statutory right of first refusal in both voluntary and judicial transfers. 

Nominee shareholders and protection of investor rights 

Disclosure of the actual investor 

Article 31 of the draft judicial interpretation, which revises Article 24 of the Company Law Judicial Interpretation (III), addresses how actual investors in limited liability companies (LLCs) can obtain legal recognition when shares are held in another person’s name. 

The article first defines the parties to litigation in such cases. When an actual investor seeks recognition of shareholder rights, the investor is the plaintiff, the company is the defendant, and the nominee shareholder is a third party. Other shareholders may also participate as third parties, clarifying the legal roles in nominee shareholding disputes.  

It then sets out two conditions – the “disclosure (显名) conditions” – under which courts should recognize the actual investor as a shareholder and order related registration changes unless otherwise stipulated by laws and regulations or the Articles of Association (AoA): 

1. The company, by resolution of the shareholders’ meeting, acknowledges the investor’s shareholder status; or
2. More than half of the other shareholders agree that the actual investor may exercise shareholder rights, or​ more than half of the other shareholders know or should have known the fact of equity holding on behalf of another party, and have not raised any objection to the actual exercise of shareholder rights by the actual investor. (Alternatively: A majority of the other shareholders consent to or are aware of the nominee arrangement and do not object to the investor exercising shareholder rights.) 

If these conditions are not met, the investor can request the sale or auction of the shares to recover their capital. The revised article also allows the nominee shareholder to claim compensation if agreed in the contract, or otherwise based on their participation and benefits. Either party may seek damages if any losses are caused by the fault of the other party.  

The article also requires courts to carefully assess whether a genuine nominee relationship exists. Relevant factors for assessing this relationship include the existence of a valid agreement, actual payment of capital, the source and capacity of funds, and the relationship between the parties. 

Invalidity of nominee shareholding arrangements  

Article 32 of the draft judicial interpretation, a newly added provision, defines when nominee shareholding agreements are invalid and outlines the legal consequences.  

Nominee arrangements are invalid in the following situations:  

1. They involve financial institutions that are in violation of laws or regulatory rules affecting financial stability;
2. They concern listed company shares that breach securities regulations or disclosure obligations;
3. They are used by civil servants or similar persons to evade restrictions on profit-making activities; or
4. Other cases violating laws or public policy.

When a nominee agreement is declared invalid, courts determine the treatment of shares based on the actual investor’s eligibility. If the investor meets the disclosure conditions outlined in Article 31, the court may recognize them as the shareholder. Otherwise, the shares may be sold or auctioned, and proceeds or compensation are distributed under the Civil Code. This follows the principle of restoring the parties to their pre-contract state or, if impossible, equitably allocating interests.  

If the agreement involves potentially illegal activity or unjust enrichment, courts must report or refer the matter to the relevant regulatory or criminal authorities.   

Unauthorized disposal by nominee shareholders  

Article 33, which is also revised Article 24 of the Company Law Judicial Interpretation (III), governs cases where a nominee shareholder transfers, pledges, or otherwise disposes of shares without the actual investor’s consent.

If such unauthorized actions occur, the actual investor may request that the transferee return the shares or confirm that a pledge was not validly established. Courts generally uphold such claims unless the transferee acquired the shares in good faith under Article 311 of the Civil Code.

A presumption of good faith applies: the transferee is deemed bona fide unless the actual investor proves that the transferee knew or should have known of the nominee arrangement.

This shifts the evidentiary burden to the actual investor, aligning with commercial appearance and transaction reliability principles.

If the unauthorized disposal causes losses, courts will support damage claims against the nominee shareholder.

Company claims for defective capital contributions

Article 34 refines rules for liability in defective or incomplete capital contributions under nominee shareholding structures, amending Article 26 of Company Law Judicial Interpretation (III).

Under the revised article, in a shareholding arrangement where a shareholder has failed to fully pay their capital contribution obligations, if the actual investor meets the disclosure conditions outlined in Article 31, and the company sues for unpaid capital, the court will hold the investor liable. The investor cannot avoid liability by arguing that they are not on the shareholder register.

If the company sues the nominee shareholder instead, the nominee cannot simply deny responsibility. However, the nominee may request to add the actual investor as a third party. If the nominee proves the investor meets the disclosure conditions, the court may guide the company to adjust its claim toward the actual investor. If the company refuses, the case will be dismissed.

The article also specifies that the company cannot demand joint and several liability from both the nominee and the investor, and that it must select one responsible party.  

Creditors’ claims for defective capital contributions

Article 35, a newly added article, extends the principles outlined in Article 34 to company creditors. When a shareholder in a nominee arrangement fails to fully contribute capital, creditors may sue either the nominee or the actual investor within the limits of Articles 21 to 24 of the draft judicial interpretation. Courts apply the framework outlined in Article 34 to determine liability.  

This reflects the principle that nominee shareholding is an internal company arrangement and cannot defeat external creditor claims. Creditors can therefore pursue either party to ensure that corporate capital remains available for debt repayment.  

Additionally, the article states that when a nominee shareholder transfers shares to the actual investor, courts must determine which of the following two legal relationships applies: 

1. A genuine equity transfer; and
2. Recognition of the actual investor’s ownership.

The issue must also be handled by the courts under the provisions of Article 34. 

By closing this loophole, Article 35 prevents evasion of capital obligations through delayed registration or proxy holding, ensuring creditors’ protection and the integrity of corporate capitalization.  

Protection of actual investor equity from enforcement 

Article 36 of the draft judicial interpretation, a newly added provision, clarifies when an actual investor can prevent enforcement against equity registered in the name of a nominee shareholder, and when creditors may instead execute against that equity to satisfy debts.

Find Business Support

Specifically, when a creditor seeks compulsory enforcement over equity recorded under the nominee’s name, an actual investor who either fulfills the disclosure conditions in Article 31 or has fully paid all subscribed capital can file an action for execution objection requesting that the equity be excluded from enforcement. If these requirements are met, the court must uphold the objection. However, this protection is not unlimited, and if the actual investor fails to raise the objection within a reasonable time after the court’s first seizure of the equity, they lose the ability to prevent enforcement, even if they otherwise qualify for recognition.

The article also addresses the reverse situation in which enforcement is initiated by the monetary creditor of the actual investor. If that creditor can show that the actual investor satisfies the disclosure conditions or has fully completed capital contributions, the court must allow enforcement directly against the equity registered under the nominee’s name. In this case, the nominee shareholder cannot block enforcement simply by pointing to the shareholder register or company registration records. 

Validity and performance of valuation adjustment mechanisms

Article 37 of the draft judicial interpretation, a newly added provision, addresses the validity, enforceability, and limits of valuation adjustment mechanisms (VAMs, also commonly referred to as bet-on agreements).

The article first upholds the general validity of VAMs, stipulating that courts should not invalidate VAM terms on the grounds that the agreement stipulates that if the company fails to meet agreed performance targets or fails to achieve listing conditions within a certain period, the company or its shareholders or actual controller will repurchase the shares or assume monetary compensation obligations, unless exceptions are otherwise stipulated in the interpretation. 

The article then clarifies that courts will not support the following requests regarding VAMs: 

• A request for continued performance of a VAM in the event that an investor enters into a VAM with a company, and the company fails to legally fulfill the capital reduction procedure or legally distribute profits.
• A request by the investor for the company to bear liability for breach of contract or guarantee liability based on such agreement, if the parties agree that the company will bear liability for breach of contract or provide collateral due to the company’s failure to legally fulfill the capital reduction procedure or legally distribute profits. 

However, the article also clarifies that where a third party provides a guarantee, the court will support the investor’s request for the third party to bear the guarantee liability. 

Article 37 confirms the validity of VAMs in principle but ties their enforceability to strict adherence to statutory processes. To mitigate risk, investors should secure guarantees from shareholders, actual controllers, or third parties rather than relying on direct contractual penalties against the company for procedural failures. 

Characterization and enforcement of equity repurchase agreements 

Article 38 of the draft judicial interpretation, another newly added provision, creates a structured framework for three common forms of equity repurchase arrangements: conditional repurchase, conditional repurchase with investor choice, and fixed term repurchase mechanisms.

Find Business Support

The first paragraph addresses conditional repurchases, where equity is transferred to the investor, and the shareholder must buy it back once a defined condition occurs. In these arrangements, the investor is treated as a real shareholder before the repurchase is completed and must bear shareholder obligations, including outstanding capital contribution responsibilities. In disputes, the company must be added as a third party, and any judgment must specify that, once the shareholder pays the repurchase price, the company must update the shareholder register and complete registration. If the shareholder cannot pay, the investor may auction or sell the equity and satisfy its claim from the proceeds.

The second paragraph concerns conditional repurchase agreements with investor choice. Once the triggering condition occurs, the investor must exercise their repurchase option within the agreed period or, if none is specified, within a reasonable period after the shareholder issues a demand. Failure to exercise the option in time bars the repurchase claim unless the shareholder consents, thereby ensuring transactional certainty.

The third paragraph governs fixed term repurchases, where equity is transferred as part of a financing arrangement requiring the shareholder to repurchase it at maturity with principal plus premium. When such agreements function substantively as security interests, courts apply the rules on equity transfer-as-collateral in the Civil Code’s Security Interest Interpretation. However, if the investor actually exercises shareholder rights in a manner exceeding the security purpose, the relationship is re-characterized as a conditional repurchase under paragraph one, with all corresponding shareholder obligations. 

Shareholder requests for share repurchase 

Article 39 introduces a clearer exit right for minority shareholders where controlling shareholders abuse their rights to the extent that participation in company management or the realization of investment returns becomes impossible.

The court will support a request by shareholders of a company to repurchase their shares at a reasonable price if a controlling shareholder of a company abuses their shareholder rights and prevents the other shareholders from participating in the company’s management or obtaining investment returns. Moreover, the court will not support a defense raised by the company that the controlling shareholder has already borne liability for damages in accordance with Article 21, Paragraph 2 of the Company Law.

If, instead, a controlling shareholder of a company abuses their shareholder rights, causing losses to other shareholders, but does not prevent the other shareholders from participating in the company’s management or obtaining investment returns, and the other shareholders request the controlling shareholder to bear liability for damages, then the court will support such a request. However, in this instance, the court will not support a request by the other shareholders of the company to repurchase their shares. 

When shareholders request the company to repurchase their shares, the repurchase price of the shares must be clearly specified. The court will, in conjunction with the adversarial proceedings between the parties, consider a variety of factors such as the number of shares transferred, the company’s net assets as recorded in the previous year’s balance sheet, and the transaction prices of shares in the company and similar companies within the past six months to determine a reasonable price for the shares. If it is still difficult to determine the price, it can be determined through judicial appraisal or other means. 

Equity transfers and preemptive rights 

Equity acquisition in LLCs 

Article 40 of the draft judicial interpretation, a new provision, clarifies at what point a transferee in an LLC legally acquires equity and obtains shareholder status. 

These are stipulated thus: 

• If parties transfer shares in an LLC, except where it is legally required that the contract requires approval, the transferee acquires the shares from the date of their registration in the shareholder register.
• However, ff the company does not maintain a shareholder register, then the transferee acquires the shares from the date they actually exercise their shareholder rights or notify the company of the share transfer. 

Additionally, the article stipulates that if the transferee is registered in the shareholder register but the change of registration has not been completed with the company registration authority, and the transferor’s monetary creditors apply for enforcement against the shares in the transferor’s name, the court will support the transferee’s request to exclude enforcement. This means that the transferee’s share rights are effective even if the change of registration has not been completed, and the transferor’s debtors cannot claim rights in this regard. 

Conflicting transfers (one share sold twice) 

Article 41 of the draft judicial interpretation, which is an amendment of Article 27 of the Company Law Judicial Interpretation (III), addresses disputes arising from double transfers of the same equity. 

In a scenario in which a share transfer agreement has been concluded but the change of registration has not been completed, the original shareholder disposes of their shares through transfer, pledge, or other means, and a third party claims to have acquired the shares or established a pledge on the shares, the court will refer to the unauthorized disposition rule of Article 311 of the Civil Code. 

If the transferee claims that the third party is not acting in good faith, the court will consider a range of factors such as: 

• Whether the company maintained a shareholder register when the third party acquired the shares or established the pledge;
• Whether the transferee was recorded as a shareholder in the shareholder register;
• Whether the shareholder register record is consistent with the company registration; and
• Whether the third party inspected the shareholder register or company registration, and asked the company about the share transfer. 

In these circumstances, the court will support a request by a third party or the share transferee who has not legally acquired the shares or established a pledge for the transferor to bear liability for breach of contract based on the contract. The court will also support requests by the transferee that the directors or senior managers who are at fault for failing to promptly complete the change of registration bear liability for damages in the case that a third party acquires equity or pledge rights in good faith. However, the liability of the directors or senior managers at fault may be reduced if the transferee is found to have failed to promptly cooperate in completing the change of registration. 

Validity of shareholder register entries 

Article 42, a new provision, defines when entries in the shareholder register have legal effect and how courts should address inconsistencies among contracts, internal records, and registration filings.

The article first confirms that the court will not support a claim that a transfer agreement is invalid on the grounds that it violates provisions of the law in cases where the capital contribution obligations stipulated in an equity transfer agreement are inconsistent with those stipulated in Article 88 of the Company Law. This means that the provisions of an equity transfer agreement have a higher legal effect than those stipulated in Article 88 of the Company Law.

However, such an agreement cannot be asserted against the company or its creditors, and the court will not support a claim from a party that the relevant agreement has been approved by the company through a shareholders’ meeting or board resolution and asserts that they should bear liability according to this agreement. 

Equity transfer under subscribed capital contribution 

Article 43, a new provision, details how existing shareholders may exercise statutory preemptive rights when another shareholder transfers equity to a non-shareholder.

It clarifies that when a shareholder transfers equity that has not yet reached the capital contribution deadline, and the statutory grounds for acceleration of maturity have been met, the court will not support the company, company creditors, or other parties that request the transferor to bear liability or the transferor and transferee to bear joint and several liability within the scope of insufficient capital contribution, as stipulated in Article 88 of the Company Law. However, the court may organize the parties to fully examine and debate the application of law and related factual issues as the focus of the dispute, and then directly make a judgment in accordance with Article 88 of the Company Law. 

In the enforcement of monetary claims, if the applicant for enforcement applies to change or add the shareholder transferring equity that has not yet reached the capital contribution deadline as the judgment debtor, the court will reject the application for change or addition and inform the applicant to file a separate lawsuit. If the applicant is dissatisfied with the ruling, then they may apply to the higher-level court for reconsideration. However, a directly filed objection to enforcement will not be accepted. 

Equity transfer in cases of incomplete capital contribution 

Article 44, an amendment of Article 18 of the Company Law Judicial Interpretation (III), outlines the allocation of liability when equity is transferred before capital contributions have been fully paid, and clarifies how responsibility is determined in cases involving insufficient contributions or withdrawn capital.

Find Business Support

The article stipulates that where a shareholder transfers equity without fully fulfilling their capital contribution obligations, and the company, company creditors, or other parties request the transferor and transferee to bear joint and several liability for the insufficient capital contribution in accordance with Article 88 of the Company Law, the transferee bears the burden of proof if they assert a defense that they did not and could not have known that the transferor had failed to fully perform their capital contribution obligations. After assuming liability, the transferee may seek recourse from the transferring shareholder, unless otherwise agreed by the parties. 

The article further clarifies that where a shareholder transfers equity after withdrawing their capital contribution, the court will not support requests by the company, company creditors, or other parties for the transferee to bear joint and several liability under Article 88 of the Company Law.  

However, if the transferor and the responsible directors, supervisors, and senior managers are unable to compensate the company for losses caused by the withdrawal of capital, the court will support a claim by the company requiring the transferee, who knew of the withdrawal of capital, to bear supplementary compensation liability. If the company fails to assert its rights through litigation or arbitration, resulting in its creditors being unable to realize their due claims, the court will also support actions brought by the company’s creditors against the transferor, the responsible directors, supervisors, senior managers, and the transferee, with the company as a third party, seeking that the transferee bear supplementary compensation liability for their due unrealized claims. 

Shareholders’ waiver of the right to transfer equity 

Article 45, which is an amendment of Articles 18 and 20 of the Company Law Judicial Interpretation (III), adjusts principles from prior interpretations by addressing transfers where the actual transfer price differs from the price disclosed to shareholders. 

First, when a shareholder of an LLC transfers shares to a person other than a shareholder, and other shareholders claim the right to purchase the shares under the same conditions but then disagree with the transfer, the court shall not support the other shareholders’ request for preemptive rights, unless otherwise stipulated in the company’s AoA or agreed upon by all shareholders. 

When determining the “same conditions”, the court will consider a variety of factors, including the quantity, price, payment method, performance period of the share transfer, as well as other matters that constitute conditions of the transaction, such as loans or services provided by the transferor to the company, as evidenced by the transferring shareholder. 

Consequences for infringing preemptive rights 

Article 46, an amendment to Article 21 of the Company Law Judicial Interpretation (IV) revises earlier provisions by clarifying how preemptive rights apply when a shareholder’s equity is sold through judicial auction or enforcement. 

First, if a shareholder of an LLC transfers shares to a person other than a shareholder without notifying the other shareholders, or uses fraud, malicious collusion, or other means to impair the other shareholders’ preemptive rights, the court will support a claim by the other shareholders to purchase the shares under the same conditions. However, this does not apply in the following circumstances: 

1. Where the other shareholders have not asserted their preemptive rights within 30 days of the date they knew or should have known of the same conditions for exercising their preemptive rights;
2. Where the other shareholders have not asserted their right within one year from the date of the change of the shareholder register;
3. Where, if the company does not maintain a shareholder’s register, the other shareholders have not asserted their right within one year of the date of registration of the company’s change of registration. 

However, the court will not support claims in cases where the other shareholders only request confirmation that the share transfer contract is invalid, but do not also claim the right to purchase the shares under the same conditions, and still do not claim the right to purchase after the court has explained the situation. 

The court will support requests by the other shareholders for the transferor to bear liability for damages because their preemptive right has been infringed if the shareholders were unable to exercise their preemptive rights due to no fault of their own. The court will also support requests from the transferee for the transferor to bear liability for breach of contract based on the share transfer agreement if the transferee is unable to acquire shares due to other shareholders exercising their preemptive right. 

Preemptive rights in competitive contractual situations 

Article 47, an amendment of Article 22 of the Company Law Judicial Interpretation (IV), addresses the transfer of equity through competitive contracting methods.

Related Reading

When transferring equity in an LLC to persons other than shareholders through competitive contracting methods such as auctions, issues concerning preemptive rights can be handled with reference to the relevant provisions of the Provisions of the Supreme People’s Court on Auctions and Sales of Property in Civil Enforcement by People’s Courts. The court will not support requests from other shareholders who did not participate in the auction or sale due to no fault of their own to exercise their preemptive rights. However, the court will support their requests for the transferor or auction institution at fault to bear liability for damages. 

No preemptive rights in non-listed joint-stock companies 

Article 48, a new provision, clarifies preemptive rights of shareholders in a non-listed joint-stock company.

Specifically, if a shareholder of a non-listed joint-stock company claims a  preemptive right against the transferor based on the provisions in the company’s AoA that other shareholders have the preemptive rights under the same conditions, the court will not support such a claim, unless the transferee knew or should have known of the provisions in the company’s AoA. 

Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, at the 15th workshop on exchange rates, co-organised by Banka Slovenije with the Banca d’Italia, the Bank for International Settlements, the European Central Bank and the Nationale Bank van België/Banque Nationale de Belgique

Ljubljana, 3 December 2025

It is an honour to participate in this excellent workshop on exchange rates and to visit Bank of Slovenia.

This speech has two parts.^[1] In the first part, I will discuss the appropriate monetary policy response to deviations of inflation from the ECB’s symmetric two per cent medium-term target. In the second part, I will turn to the topic of this conference and outline some analytical perspectives on the interplay between the exchange rate and monetary policy.^[2]

Inflation deviations and monetary policy

The ECB has a clear orientation for the conduct of monetary policy: a symmetric two per cent inflation target over the medium term. This is articulated in our monetary policy strategy statement as follows:

“The Governing Council considers that price stability is best maintained by aiming for two per cent inflation over the medium term. The Governing Council’s commitment to this target is symmetric. Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable. The two per cent inflation target provides a clear anchor for inflation expectations, which is essential for maintaining price stability.”

In pursuing the symmetric two per cent target, a working definition of the medium term is required. Our monetary policy strategy statement provides a nuanced description:

“The flexibility of the medium-term orientation takes into account that the appropriate monetary policy response to a deviation of inflation from the target is context-specific and depends on the origin, magnitude and persistence of the deviation. Subject to maintaining anchored inflation expectations, it also allows the Governing Council in its monetary policy decisions to cater for other considerations relevant to the pursuit of price stability.”

How should such high-level strategic guidelines be implemented in practice? Let me make a few comments.

It is straightforward that small inflation deviations that are not expected to persist do not call for a monetary policy response. Most obviously, lags in the transmission of monetary policy mean that it would be counterproductive to seek to respond to near-term deviations that are solidly expected to be transitory. Moreover, a small and transitory deviation is unlikely to trigger the adjustment dynamics that can turn temporary deviations into longer-lasting deviations.

At the other extreme, it should also be clear that a sufficiently large and persistent deviation from the target requires a monetary policy response, regardless of its origin.

First, through the cost-of-living channel, the current inflation rate may influence subsequent price and wage-setting, as firms and workers respond to lower cost pressures in relation to negative deviations and higher cost pressures in relation to positive deviations.

Second, the real interest rate channel can reinforce an inflation shock that is expected to display some persistence: if a drop in inflation today is associated with ongoing low inflation for, say, the next year or two, this translates into a higher real interest rate (nominal rate minus expected inflation) over the relevant horizon. In turn, this puts downward pressure on consumption and investment, adding to the disinflationary impulse. Symmetrically, above-target inflation that is expected to persist for some time maps into a lower real interest rate and amplifies inflationary pressures.

Third, a persistent shift in the inflation rate can influence the formation of inflation expectations if people put some weight on simple extrapolation in forming expectations. Under such extrapolative behaviour, if inflation runs below target for a year or two, there is some risk that people might revise down their beliefs about the de facto medium-term inflation target. Symmetrically, if inflation runs above target for a year or two, there is some risk that people might revise up their beliefs about the de facto medium-term inflation target.

Fourth, a material inflation deviation that does not trigger a monetary policy response poses a communication risk, since markets, firms and households may find it difficult to understand the reaction function if there is no reaction.^[3] In turn, greater uncertainty about the reaction function can give rise to higher volatility in expectations about inflation and the policy rate path.

Given these mechanisms, a material deviation of inflation from the target calls for a monetary policy response. Since the cost-of-living, real interest rate, expectations-deanchoring and communication channels operate in a plausibly non-linear manner (individually and collectively), the appropriate monetary policy is also non-linear, with an incremental adjustment to mid-sized deviations but a more forceful or persistent adjustment to large deviations. 

This non-linearity is recognised in our monetary policy strategy statement, which highlights that:

“To maintain the symmetry of its inflation target, the Governing Council recognises the importance of appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the target in either direction, to avoid deviations becoming entrenched through de-anchored inflation expectations.”

How should monetary policy respond to material deviations that fit neither the “small, transitory” category that can clearly be ignored, nor the “large, sustained” category that clearly triggers a non-linear response that is appropriately forceful or persistent? For this intermediate category of “mid-sized, somewhat persistent” deviations, the origin of the inflation deviation should play an important role in determining the appropriate monetary policy reaction.^[4]

In particular, an intermediate-category broad-based inflation deviation likely calls for an incremental adjustment in the monetary stance. In essence, this is the standard prescription of monetary policy feedback rules (such as the “family” of Taylor rules). However, if the origin of the inflation deviation is a supply-driven relative price level shock, the case for an active monetary policy response is more nuanced.^[5]

In particular, a supply shock to the relative price level of energy does not pose the same risk to medium-term inflation as a shock to domestic demand.

While an intermediate-category shock to the relative price level of energy may visibly alter headline inflation for a substantial fraction of the projection horizon (energy comprises about 10 per cent of the overall Harmonised Index of Consumer Prices (HICP)), it might not materially alter the broader underlying inflation dynamics that are most important in determining the medium-term inflation trend. In particular, an intermediate-category supply-driven relative energy price level shock might not be sufficiently large or persistent to generate a broader wave of price changes, with energy-using sectors choosing to absorb the cost shock in margins rather than passing it through to the consumer.

The impact of a supply-driven relative price level shock on overall inflation also tends to have an inbuilt, self-correcting element. For instance, a decrease in the relative price level of energy will boost activity levels in energy-using sectors, with less slack in the economy putting upward pressure on inflation over the medium term. More broadly, since energy has a high import content, a decrease in the relative price level of energy typically constitutes an improvement in the terms of trade, boosting the real incomes and consumption levels of euro area households and thereby further adding to medium-term inflation pressures. In the opposite direction, symmetric mechanisms apply in relation to a positive shock to the relative price of energy.

These considerations mean that, within the intermediate category, a supply-driven inflation deviation that is primarily sectoral in origin does not pose the same risk to the medium-term inflation target as a broad-based inflation deviation. This means that it is essential in determining the appropriate monetary policy stance to carefully analyse the realised and projected dynamics of supplementary inflation measures, such as non-energy inflation (the sum of all categories excluding energy) and core inflation (further excluding the food category).^[6]

Clearly, it is a judgement call to determine how to respond to intermediate-category inflation deviations. Such judgement calls are best made on a meeting-by-meeting, data-dependent basis that draws on a comprehensive and rigorous analytical framework to take account of the unfolding evidence in relation to the shocks driving inflation deviations, and whether there are incipient signs that relative price shocks are transforming into broader inflation dynamics. This meeting-by-meeting, data-dependent approach is especially helpful under conditions of elevated uncertainty.

This analytical framework necessarily involves inspecting and modelling the current and projected behaviour of wages, profit margins, the suites of underlying inflation indicators and indicators of inflation expectations to assess whether a moderate inflation deviation might turn into a larger or longer deviation. It also involves a wide-ranging risk assessment. Amongst other dimensions, an important set of risk scenarios relates to possible amplification shocks, by which an inflation deviation might grow larger or become more persistent. This means that upside inflation shocks are especially salient if the baseline exhibits a positive inflation deviation. Symmetrically, downside inflation shocks are especially salient if the baseline exhibits a negative inflation deviation.

In summary, this discussion has emphasised that the appropriate monetary policy response to an inflation deviation from the target is context specific and requires a careful analysis of a broad set of considerations. Of course, the capacity to consider “looking through” some types of inflation deviations depends on a strong institutional commitment to delivering the symmetric inflation target over the medium term, underpinning firmly-anchored medium-term inflation expectations.^[7]

The interplay between the exchange rate and monetary policy

Let me now switch gears and turn to the interplay between the exchange rate and monetary policy. Chart 1 shows the nominal and the real effective exchange rates of the euro against 18 major trading partners, indexed against their values in 1999. While there have been prolonged and substantial currency swings over the lifetime of the euro, there has been no clear overall trend with currency shifts tending to reverse over time.

Chart 2 zooms in on the last decade and shows the euro exchange rate against the US dollar, the Chinese renminbi and a basket of selected Asian currencies since 2014. Since the start of the hiking cycle in Summer 2022, there has been marked appreciation of the euro against these major trading partners. For the renminbi in particular, this appreciation has been even stronger in real terms than in nominal terms, reflecting the much larger cumulative inflation in the euro area relative to China during this period.

Chart 2

The euro against the US dollar, Chinese renminbi and Asian currencies

Nominal and real USD/EUR	Nominal and real CNY/EUR	Effective exchange rates for the euro against selected Asian currencies
(USD per EUR)	(CNY per EUR)	(index: 31/01/2014 = 100)

Chart 3 zooms in further by examining the evolution of the dollar-euro exchange rate over the last year (Q4 2024 through Q3 2025) in the context of a BVAR model maintained by ECB staff. A striking feature of this analysis is the contribution of risk sentiment to euro appreciation in Q2 2025, reflecting some mix of a decline in risk sentiment towards the dollar and an improvement in risk sentiment towards the euro.

Transmission of the exchange-rate: model-based impact

Model-based analysis allows for a broader analysis of the transmission of exchange rate changes on the key macroeconomic variable. Simulations based on the ECB’s semi-structural multi-country model indicate that a 10 per cent appreciation in the euro plays out over several years, with inflation markedly lower for about three years and a peak disinflation impulse of 0.6 percentage points after about a year.^[8] The level of GDP declines throughout this adjustment period, with a cumulative loss of about one per cent of GDP after three years. In relation to trade dynamics, the euro appreciation reduces export volumes by about 3 per cent over this horizon and import volumes by about 1.5 per cent.

In the model, the transmission of the exchange rate shock operates primarily through the effects on trade deflators, which in turn influence export and import volumes. The appreciation makes euro area exports more expensive on international markets, reducing export volumes. At the same time, the appreciation also lowers the price of imports, dampening domestic inflationary pressures. Overall, imports decline despite the reduction in import prices as the demand drag dominates, with both private consumption and investment decreasing: consumption falls as economic activity contracts and labour demand slows. Investment declines as higher real interest rates and the appreciation’s disinflationary effects take hold. The resulting drop in the relative price of investment goods further suppresses investment, especially in externally exposed sectors.

Chart 4

Impulse responses to a 10 per cent euro appreciation in the ECB Multi-Country Model

HICP inflation	Real GDP	Real exports	Real imports
(percentage point deviation from steady-state year-on-year growth rate)	(percentage deviation from steady state)	(percentage deviation from steady state)	(percentage deviation from steady state)

Transmission of the exchange-rate: financial conditions

It is important to analyse the impact of currency movements using a range of different approaches. In addition to standard macroeconomic models, it is also helpful to study the impact of the exchange rate on financial conditions. In particular, currency movements operate via financial channels in addition to trade channels by altering the relative wealth of domestic investors versus foreign investors and affecting home and foreign asset prices.

Chart 5 shows the contribution of the exchange rate to the “Macro-Finance” financial conditions index (MF-FCI) that has been developed by ECB staff. ^[9] While the exchange rate only accounts for a relatively minor proportion of the total variation in the MF-FCI, it still adds significant explanatory power on top of the contributions of nominal and real interest rates and risk asset prices.^[10]

In the run-up to the global financial crisis, euro appreciation added to the tightening of financial conditions in the euro area. During the European debt crisis and in its aftermath, the weaker euro reinforced the generally accommodative monetary policy by contributing to the loosening of financial conditions. Since 2017, the regained strength of the euro has tightened financial conditions to varying degrees. Most recently in 2025, the euro has recorded its strongest tightening impulse on the MF-FCI , partly explained by the relative weakening of the US dollar.

In the baseline version of the MF-FCI, the coefficient of the euro NEER is positive, in line with the notion that an appreciation in the euro tends to tighten financial conditions in the euro area (Chart 5, hollow bar). A benefit of the methodology underlying the new index is its flexibility in estimating other specifications. The coefficients in the baseline do not only resemble average effects over the estimation sample from 2007 until 2025, but possibly also across underlying variables. In the case of the NEER, a meaningful model extension substitutes the NEER with euro exchange rates (Chart 5, filled bars). The positive average coefficient of the NEER is primarily driven by the EUR/USD, pointing to the importance of the US dollar for global financial markets and the relevance of a stronger euro relative to the US dollar as a dampener of the euro area economy. By contrast, a stronger euro relative to the Chinese renminbi indicates a loosening of financial conditions. Finally, a stronger euro relative to the Swiss Franc is also associated with a loosening of financial conditions, which is consistent with the special status of the Swiss France as a safe haven currency that weakens during “risk on” phases.

Model-based impulse responses to a surprise monetary policy expansion

Finally, it is also important to understand how the exchange rate responds to monetary policy decisions. In what follows, I show model-based simulations of a surprise monetary policy easing carried out by ECB staff. The simulations use the ECB-BASE and New Area-Wide Model (NAWM) models, which treat the euro area as a small, open economy, as well as a two-region model calibrated on the euro area and the rest of the world (GMGS henceforth).^[11] All three models account for changes in trade and asset flows across regions following changes in euro area monetary policy.

The impulse responses show the effect of a surprise 100-basis point monetary policy easing (in annualised terms; see Chart 6, panel a). The shock lowers domestic interest rates relative to foreign interest rates, triggering asset outflows that result in a nominal and real exchange rate depreciation (Chart 6, panels b and d). In the ECB-BASE model, the reaction is less frontloaded, as it is linked to long-term yields, which react more sluggishly. In the GMGS model, the real depreciation is less pronounced than in the NAWM, as in the latter inflation responds more sluggishly due to partial backward indexation and stickiness also affecting importers.

The depreciation makes domestic goods cheaper relative to foreign goods, improving price competitiveness in international markets. As the domestic currency depreciates, foreign demand for domestically produced goods increases, leading to an increase in real exports (Chart 6, panel e). The increase is more sluggish in the ECB-BASE model, reflecting the slower adjustment of the real exchange rate and a shock transmission mechanism with backward-looking expectations.

On the import side, two opposing forces come into operation following the monetary policy easing, as both import prices and domestic demand increase. On the one hand, the weaker exchange rate raises the domestic currency price of foreign goods, which tends to reduce imports. On the other hand, monetary easing stimulates overall domestic demand, including for imported goods. In the GMGS and the NAWM models, the demand effect slightly outweighs the price effect, leading to an increase in real imports, which is more limited than the increase in exports (Chart 6, panel f). Therefore, there is an improvement in the trade balance (Chart 6, panel g). By contrast, the domestic demand effect is stronger in the ECB-BASE model, as – which has a high import content – increases in response to the shock, leading to a deterioration in the trade balance. In the longer term, the trade balance also deteriorates in the GMGS and NAWM models: as higher prices feed through to export prices, the initial boost to exports fades. By contrast, domestic demand remains stronger more persistently, keeping imports higher for longer.

Overall, the results align with the empirical evidence shown in the context of my keynote speech at the CEPR International Macroeconomics and Finance Programme Meeting in 2019.^[12] Empirically, a monetary policy easing shock weakens the euro and stimulates both euro area exports and imports. In net terms, the trade balance improves as the response of exports is stronger than the increase in imports.

In order to obtain a better understanding of the importance of the role of the exchange rate in the transmission of monetary policy, it is helpful to “switch off” this channel in an alternative simulation exercise. The model simulations in Chart 7 examine the same policy trajectory as those in Chart 6, but with the nominal exchange rate held constant.^[13] Under this counterfactual scenario, exports would remain largely stable as they would no longer benefit from improved terms of trade (Chart 7, panel e), while imports would grow more significantly due to the absence of currency depreciation, which would prevent foreign goods from becoming more expensive (Chart 7, panel f).

As a result, the trade balance would worsen (Chart 7, panel g), leading to a somewhat smaller increase in GDP (Chart 7, panel h). In addition, the rise in inflation would be smaller (Chart 7, panel c), as the absence of currency depreciation would prevent imports from becoming more expensive. In summary, in response to an easing impulse, the depreciation in the exchange rate strengthens the impact of monetary policy on output and inflation.

Wrapping up, the aim of this part of the speech has been to explain some of the analytical approaches used by the ECB staff to understand the macroeconomic role of the exchange rate. Of course, the exchange rate is just one variable among many in determining euro area macroeconomic dynamics and our overall evaluation of economic and financial developments is based on an integrated assessment of all relevant factors.