THE ECB’S NEW MONETARY POLICY STRATEGY

11/07/2022 |  Christophe Kamps, Frank Smets
 

Introduction

On 8th July 2021, European Central Bank (ECB) President Lagarde announced the new monetary policy strategy of the ECB. This followed a thorough review of the experience with the existing strategy, which dated from 2003, and of the profound structural changes that had taken place since then, including the declining trend in equilibrium real interest rates. The review took the ECB’s mandate conferred by the Treaty on the Functioning of the European Union as given. The primary objective of the ECB is to maintain price stability in the euro area. Under the Treaty, without prejudice to the price stability objective, the ECB shall also support the general economic policies in the EU with a view of contributing to the achievement of the Union’s objectives such as balanced economic growth, full employment and social progress, and a high level of protection and improvement of the quality of the environment. The ECB shall also contribute to the smooth conduct of policies pursued by the competent authorities relating to the stability of the financial system.

The main elements of the new strategy are summarized in twelve points in the ECB’s monetary policy strategy statement and explained in an overview article published in the ECB’s Economic Bulletin. This article is based on the overview article and the background work collected in 18 ECB Occasional Papers In Section 2, we expand on the factors behind the quantitative formulation of the price stability objective as a symmetric 2 percent inflation target. In Section 3, we explain how other considerations, such as balanced growth, employment, financial stability and environmental sustainability that are relevant to the pursuit of price stability, are taken into account.

 

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