ECB’s monetary policy strategy
The primary objective of the single monetary policy of the Eurosystem is to maintain price stability in the euro area and hence to preserve the purchasing power of the euro. The ECB aims for 2% inflation in the euro area over the medium term.
In accordance with the Treaty on the Functioning of the European Union, the primary objective of the ECB’s monetary policy is price stability. The Governing Council of the ECB has specified that price stability is best maintained by aiming for 2% inflation in the euro area over the medium term. Finland is part of the Eurosystem and participates in its single monetary policy.
The ECB aims for 2% inflation over the medium term
The Governing Council of the ECB adopted a definition of price stability in 1889, stating that price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2% over the medium term. In 2003, the Governing Council clarified its monetary policy strategy, announcing that it will aim to maintain inflation rates close to, but below, 2% over the medium term in the pursuit of price stability. This adjustment served to highlight the purpose of preserving a sufficient safety margin against the risk of deflation.
The ECB’s new monetary policy strategy was published in July 2021. The Governing Council considered that price stability is best maintained by aiming for 2% inflation over the medium term.
The Governing Council is committed to a symmetric 2% inflation target. Symmetry means that the Governing Council considers both negative and positive deviations from this target as equally detrimental.
The Governing Council’s commitment to this target is symmetric. Symmetry means that the Governing Council considers both negative and positive deviations from this target as equally detrimental. The 2% inflation target provides a clear anchor for inflation expectations, which is essential for the maintenance of price stability and the effective transmission of monetary policy.
To maintain the symmetry of its inflation target, the Governing Council recognises the importance of taking into account the implications of the effective lower bound. When the economy is close to the lower bound, this requires especially forceful or persistent monetary policy measures to avoid negative deviations from the inflation target becoming entrenched.
Monetary policy strategy provides a framework for the decision-making and communication on monetary policy
The Eurosystem’s monetary policy strategy is a structured description of the monetary policy decision process. The strategy has two key functions. First, it provides a framework for the policy decision process. The strategy must ensure that the Governing Council has access to all the information and analyses required for the making of efficient monetary policy decisions that maintain price stability. Second, the strategy is also a tool for communication with the public. Monetary policy is most efficient when it is credible, i.e. when the public is convinced that monetary policy is committed to the price stability objective and implemented so that the goal is efficiently achieved.
To perform these two complementary tasks, it is essential that the central bank has a good understanding of the key factors affecting the economy and their interdependencies. It is especially important to be able to understand the significance of factors concerning the current and future threats to price stability which can be obtained by studying current economic developments.
The monetary policy strategy in assessments of macroeconomic developments is based on two interdependent analyses. The economic analysis focuses on real and nominal economic developments. The monetary and financial analysis examines monetary and financial indicators, with a focus on the operation of the monetary transmission mechanism and the possible risks to medium-term price stability from financial imbalances and monetary factors.
The pervasive role of macro-financial linkages in economic, monetary and financial developments requires that the interdependencies across the two analyses are fully incorporated.
The Governing Council is also committed to implementing an ambitious climate-related action plan. In addition to the comprehensive incorporation of climate factors in its monetary policy assessments, the Governing Council will adapt the design of its monetary policy operational framework in relation to disclosures, risk assessment, corporate sector asset purchases and the collateral framework.