Monetary policy

Benefits of price stability

The Constitutional Treaty for the European Union set, as the primary objective of the Eurosystem, the safeguarding of price stability.

This objective refers to the general level of prices and consists, therefore, in avoiding both prolonged inflation and deflation.

The benefits derived from this stability are vast:

  • It makes it easy to recognise relative price variations, which enables companies and consumers to decide how they wish to invest or spend their money. This makes it possible to assign resources more efficiently and increase the economy's productive potential.
  • It reduces interest rate premiums demanded by investors as compensation for the risks that come from maintaining nominal assets over the long term to protect their capital against unforeseen inflation. In this way there is more incentive to invest.
  • It limits the probability of individuals and companies diverting resources that could be put to productive use as a means of protecting themselves against inflation. In a situation of high inflation rates, there is a tendency to accumulate property assets given that they retain their value better than money or financial assets. However, this is an inefficient investment decision that hampers economic growth.
  • It eliminates the real financial costs that are generated when inflation intensifies the distortional effect of the tax and social security systems.
  • It mitigates the effects of inflation on the cash trends (acting like a tax), which reduces household demand and therefore generates higher transaction costs.
  • It preserves social cohesion and stability. High inflation or deflation rates usually generate social and political unrest.