In accordance with the Treaty on the Functioning of the European Union, the primary objective of the monetary policy of the Eurosystem is to maintain price stability in the euro area and hence safeguard the purchasing power of the euro.
In 1998, the Governing Council defined price stability as ‘a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2% in the medium term’. In 2003, the Governing Council clarified its monetary policy strategy, announcing then that it will aim to maintain inflation rates close to 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.
In 2021, the ECB Governing Council specified that price stability is best maintained by aiming for 2% inflation over the medium term. The Governing Council’s commitment to this target is symmetric, which means that it considers that both negative and positive deviations from this target are equally undesirable. The 2% inflation target provides a clear anchor for inflation expectations, which is essential for maintaining price stability.
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. Inflation may also be moderately above the 2% target for a transitory period.
The Eurosystem’s monetary policy strategy is a structured description of the monetary policy decision process. The strategy has two key functions:
It provides a framework for the policy decision process. The strategy must ensure that the Governing Council of the ECB has access to all the information and analyses required for the making of efficient monetary policy decisions that maintain price stability. 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 fully 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 to know how the economy works. It is especially important to be able to understand the significance of concerning 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:
Within this framework, the economic analysis focuses on real and nominal economic developments, whereas 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.
This framework reflects the changes that the ECB’s economic analysis and monetary analysis have undergone since 2003, the importance of monitoring the transmission mechanism in calibrating monetary policy instruments and the recognition that financial stability is a precondition for price stability.
Having a strategy based on the two interdependent analyses will ensure that monetary, economic and financial developments across the euro are monitored and analysed carefully. This in-depth analysis enables the ECB to set its key interests at a level that is best suited to promoting price stability. In this way, the Eurosystem safeguards the purchasing power of the euro while supporting the external value of the currency, as measured by the exchange rate against other currencies. However, no targets have been set for the monetary policy strategy.
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.