The ECB’s definition of price stability makes clear that the focus of its monetary policy is on the euro area as a
whole. This reflects its euro area-wide mandate. Therefore, price stability is assessed on the basis of price
developments in the euro area economy.
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By referring to “an increase in the HICP of below 2%” the definition makes clear that not only inflation above 2% but also
deflation (i.e. price level declines) is inconsistent with price stability.
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Reasons for aiming at below, but close to, 2%
Inflation rates of below, but close to, 2% are low enough for the economy to fully reap the benefits of price stability.
It also underlines the ECB’s commitment to
provide an adequate margin to avoid the risks of deflation. Having such a safety margin against deflation is
important because nominal interest rates cannot fall below zero. In a deflationary environment monetary policy
may thus not be able to sufficiently stimulate aggregate demand by using its interest rate instrument. This makes it
more difficult for monetary policy to fight deflation than to fight inflation.
take into account the possibility of HICP inflation slightly overstating true inflation as a result of a small but
positive bias in the measurement of price level changes using the HICP.
provide a sufficient margin to address the implications of inflation differentials in the euro area. It avoids
that individual countries in the euro area have to structurally live with too low inflation rates or even deflation.