The ECB’s monetary policy strategy review

On July 8, 2021, the European Central Bank approved and published its new monetary policy strategy. The ‘old’ strategy – announced in October 1998, ie 10 weeks before the start of the euro – was last reviewed in 2003 and adjusted slightly. That it took so long for a comprehensive review can be seen as an indication that the framework decided more than 20 years ago has worked well.

The main changes are the following. Price stability is best maintained by aiming for 2% inflation over the medium term. The previous definition of price stability was “below 2%”. The review of 2003 confirmed this definition and agreed that the Governing Council would aim to maintain inflation rates close to 2% over the medium term. The announcement of 2% was overdue. More important is the introduction of ‘symmetry’, which means that the council assesses negative and positive deviations from this target as equally undesirable.

The change in relation to the former ‘two-pillar approach’ relates mainly to the extension of the monetary analysis and the ambition to provide an integrated assessment.

A big change in the strategy is the commitment to a climate-related action plan. The council has published a roadmap for incorporating climate-change considerations into its policy framework.

It remains to be seen to what extent this ambitious plan will contribute to addressing climate change without interfering with the ECB´s primary goal to maintain price stability. For the time being, it remains an open question whether the central bank can deliver on its commitment.

An assessment of the instruments of monetary policy, the intention to revise the Harmonised Index of Consumer Prices – with the inclusion of the costs related to owner-occupied housing – and changes in the communication supplement the new strategy.

The next assessment of the appropriateness of the monetary policy strategy is expected for 2025.

A comprehensive review of the ECB’s new monetary policy strategy by the ECB’s founding chief economist, Otmar Issing, is scheduled for the September 2021 edition of Central Banking journal.