Monetary policy strategy
The European Central Bank's monetary strategy is based on two main elements:
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A quantitative definition of price stability, although,
it does not offer a precise definition of this even though the Maastricht Treaty clearly establishes that the main objective of the Eurosystem is to maintain price stability.To determine this objective more precisely, the ECB's governing council gave the following quantitative definition in 1998: "Price stability is defined as the annual increase of the Harmonised Consumer Price Index (HCPI) in the Eurozone of less than 2% Price stability must be maintained in the medium term".
In 2003, after an exhaustive evaluation of monetary policy strategy, the Governing Council clarified that according to their definition, its objective was to maintain inflation rates below 2% but close to this percentage in the medium term.
An exhaustive analysis of the risks to the price stability.
The analysis was organised from two complementary analytical perspectives on price evolution called the two "pillars": economic analysis and monetary analysis.The objective of the first pillar, the economic analysis, was to evaluate what determined the behaviour of prices in the short and medium term focusing on the real activity and financial situation of the economy; taking into account the influence of demand and supply on services and asset markets and other factors.
The real economic indicators, the evolution of financial markets, exchange rates and the macroeconomic forecasts for the Eurozone were analysed by exports from the Eurosystem among other elements.
The second pillar, the monetary analysis focused on the wider vision and looked at the long term relationship between money and prices. Above all, it helps to compare, from a medium and long term perspective, the short and medium term indicators from the economic analysis.
The evolution of a wide range of monetary indicators was taken into account, including M3, its components and counterparties, and an exhaustive evaluation of the credit and liquidity situation was carried out.
This two pillars based approach serves to contrast the short term indicators from the economic analysis and the long term indicators of the monetary analysis, which guarantees that monetary policy does not overlook information that is important for evaluating these future price trends and reduces the risk of errors that would arise from excessive dependency on a single indicator or model.