Monetary policy

The strategy of the ECB

The monetary policy strategy of the European Central Bank (ECB) hinges on two main elements:

A quantitative definition of price stability

Although the Maastricht Treaty clearly establishes that the main objective of the Eurosystem is to maintain price stability, it offers no precise definition of what it understands by this.

To determine this objective more precisely, the Governing Council of the ECB gave the following quantitative definition in 1998: "Price stability is defined as the year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the Eurozone of less than 2%. Price stability shall be maintained in the medium term".

In 2003, after a comprehensive evaluation of monetary policy, the Governing Council clarified that, in the pursuit of price stability, it aimed to maintain inflation rates below, but close to 2% in th medium term.

A comprehensive analysis of the risks to price stability

This analysis is organised from two complementary, analytical perspectives, called the two-pillar approach, to assess price performance:

  • Economic analysis

    Pillar one, or economic analysis, assesses the factors determining short- to medium-term price developments. The focus is on real activity and financial conditions in the economy, taking into account the influence of the interplay of supply and demand in the goods, services and factor markets.

    Analysis is conducted on real economic indicators, financial markets, exchange rates and the macroeconomic projections drawn up for the Eurozone by the Eurosystem experts, among others.

  • Monetary analysis

    Pillar two, or monetary analysis, focuses on a longer-term horizon and exploits the long-run link between money and prices. It mainly serves as a means of cross-checking, from a medium- to long-term perspective, the short to medium-term indications for monetary policy coming from the economic analysis.

    Account is taken of a wide range of monetary indicators, including the M3, their components and counterparties, and a comprehensive assessment of the credit and liquidity situation is carried out.

    This two-pillar approach serves to cross-check the shorter-term indications of the economic analysis with the longer-term indications of the monetary analysis. This guarantees that the monetary policy does not overlook important information for evaluating future price trends and reduces the risk of errors that would arise from excessive dependency on a single indicator or format.