Why is the ECB reviewing its strategy now?
Since our last strategy review in 2003 we have seen fundamental changes in the economy. Declining growth and the legacy of the financial crisis have driven interest rates down, making it harder for the ECB and other central banks to ease monetary policy when economic growth is slow. As a result, our set of instruments has expanded. Developments like globalisation, digitalisation, an ongoing ageing population and climate change also pose new challenges to the economy. We want to make our monetary policy strategy as effective as possible in this challenging and changing environment – both today and in the future.
There are a few issues that have prompted us to launch a review.
Historically low interest rates. Rates are low for several reasons: the pace at which economies are growing over time is slowing, productivity (how efficiently we work) in most advanced economies is growing more slowly and the population is ageing. Slowing productivity and a declining active population drive down interest rates. An ageing population saves more money, which pushes interest rates down further.
Limits to lowering interest rates. Traditionally, central banks raise interest rates when inflation is too high. When inflation is too low interest rates are lowered to support economic activity. Current interest rates are close to zero or even negative, making it harder for the ECB and other central banks to lower rates in the typical way during periods of slow growth and low inflation. New instruments – non-standard monetary policy measures such as the asset purchase programmes – have been put in place to respond to these limits and ensure price stability.
Climate change, ongoing globalisation, rapid digitalisation and changing financial structures. These trends can have unexpected effects on the world, on the way the economy functions, and so also on our monetary policy.