The new monetary policy strategy of the European Central Bank that was announced in July 2021 followed a thorough review, launched in January 2020. The strategy was last reviewed in 2003.
The aim of the review was to make sure that our monetary policy strategy is fit for purpose, both today and in the future, enabling us to fulfil our price stability mandate. In doing so, we bolster the value of the euro, support economic growth and job creation, and promote prosperity and social cohesion.
The new strategy is a strong foundation that will help guide us in the conduct of monetary policy in the years to come.
Monetary policy strategy
The economic analysis monitors current economic, financial and price developments and assesses their impact on inflation.
The economic and financial variables that are the subject of this analysis include: developments in overall output; aggregate demand and its components; fiscal policy; capital and labour market conditions; developments in the exchange rate of the euro, the global economy and the balance of payments.
As part of the economic analysis, ECB and Eurosystem staff macroeconomic projections are prepared and published four times a year.
The monetary analysis
The Governing Council of the European Central Bank (ECB) considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. The 2% cent inflation target provides a clear anchor for inflation expectations, which is essential for maintaining price stability. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable. When the economy is operating close to the lower bound on nominal interest rates, it requires especially forceful or persistent monetary policy action to avoid negative deviations from the inflation target becoming entrenched. This may also imply a transitory period in which inflation is moderately above target.
The Governing Council confirmed that the Harmonised Index of Consumer Prices (HICP) remains the appropriate measure for assessing price stability. However, it recognises that the inclusion of the costs related to owner-occupied housing in the HICP would better represent the inflation relevant for households and that the inclusion of owner-occupied housing in the HICP is a multi-year project. So in the meantime, the Governing Council in its monetary policy assessments will take into account inflation measures that include initial estimates of the cost of owner-occupied housing to supplement its set of broader inflation measures.
The Governing Council also confirmed that the set of ECB interest rates remains the primary monetary policy instrument. Other instruments, such as forward guidance, asset purchases and longer-term refinancing operations, that over the past decade have helped mitigate the limitations generated by the lower bound on nominal interest rates, will remain an integral part of the ECB’s toolkit, to be used as appropriate.
The Governing Council acknowledged that climate change has profound implications for price stability and, accordingly, it has committed to an ambitious climate-related action plan.
The Governing Council intends to assess periodically the appropriateness of its monetary policy strategy, with the next assessment expected in 2025.
Strategy review key topics
For the strategy review, the ECB looked at key topics to make sure that how the way it carries out its monetary policy is fit for purpose and reflects the reality we live in. For details, click:
During the review period, the Bank of Greece, like the European Central Bank and the other national central banks, hosted listening activities with the general public, civil society organisations and academia. Ideas and perspectives shared at these events have fed into the ECB Governing C4th ECB Simulation Conference by Get Involvedouncil’s deliberations.