A monetary policy strategy is a coherent and structured description of how monetary policy decisions will be made in order to achieve the objective of the central bank.
It has two important tasks to fulfil. First, by imposing a clear structure on the policy-making process itself, the strategy ensures that the ECB's Governing Council has at its disposal the necessary information and analyses required to take such decisions (internal dimension). Second, it is a vehicle for explaining monetary policy decisions to the public (external dimension). By contributing to the effectiveness of monetary policy, and by signalling the central bank's commitment to price stability, the strategy contributes to the credibility of the ECB in the financial markets.
The main task of the ECB as the heart of the Eurosystem is the conduct of monetary policy in the euro area with the aim to maintain price stability. By setting short-term interest rates, monetary policy influences the economy, and ultimately the price level.
To conduct monetary policy in the best possible way, the ECB follows a specific approach in order to determine the nature and the extent of risks to price stability in the euro area. In order to do so, the ECB needs to thoroughly analyse economic and monetary developments. To ensure that no relevant information is overlooked, it has developed the so-called "two-pillar approach".
The ECB's approach to organising, evaluating and cross-checking the information relevant for assessing the risks to price stability is based on two complementary analytical perspectives, referred to as the two "pillars":
The economic analysis is aimed at assessing the short to medium-term determinants of price developments, with a focus on real activity and financial conditions in the economy. It takes account of the fact that price developments over those horizons are influenced largely by the interplay of supply and demand in the goods, services and factor markets.
The monetary analysis focuses on a longer-term horizon, exploiting the long-run link between money and prices. The monetary analysis 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.
The two-pillar approach is designed to ensure that no relevant information is lost in the assessment of the risks to price stability and that appropriate attention is paid to different perspectives and the cross-checking of information in order to come to an overall judgement on the risks to price stability. It represents, and conveys to the public, the notion of diversified analysis and ensures robust decision-making based on different analytical perspectives.
For details about the ECB's monetary policy, see www.ecb.europa.eu/mopo
Alternatively, order a hard copy of the book "The monetary policy of the ECB" (approx. 120 pages) from email@example.com.
MP.004 01/12European Central Bank