The medium-term orientation gives the ECB the flexibility required to respond in an appropriate
manner to the different economic shocks that might occur.
To maintain price stability over the medium term is the primary objective of the ECB's monetary
policy. The medium-term orientation reflects the fact that monetary policy cannot, and therefore
should not, attempt to fine-tune developments in prices or inflation over a few weeks or months.
Moreover, the medium-term orientation makes it possible for monetary policy to take into account
concerns about output fluctuations, without putting price stability at risk.
An economy is continually subject to largely unforeseeable shocks that also affect price
developments. But monetary policy can affect price developments only with significant time
lags. The time lags are variable and, like most economic relationships, highly uncertain.
It is impossible for any central bank to keep inflation always at a specific point target or to
bring it back to a desired level within a very short period of time. Consequently, monetary policy
needs to act in a forward-looking manner and can only maintain price stability over longer periods
At the same time, to retain some flexibility, it is not advisable to specify ex-ante a precise horizon
for the conduct of monetary policy, since the transmission mechanism spans a variable, uncertain period
of time. Also, the optimal monetary policy response to ensure price stability always depends on the
specific nature and size of the shocks affecting the economy.
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Response to shocks
For a wide variety of shocks (e.g. demand shocks that move output and prices in the same direction)
a prompt reaction by monetary policy is often adequate and will not only preserve price stability
but also help to stabilise the economy.
But there are other types of economic shocks (e.g. of a cost-push nature, like oil price hikes)
that move output and prices in opposite directions.
An excessively aggressive policy response to restore price stability in a very short span of
time may cause significant output and employment volatility which, over a longer horizon,
could also affect price developments. In these cases, it is widely recognised that a gradual
response of monetary policy is appropriate both to avoid unnecessarily high volatility in real
activity and to maintain price stability over a longer horizon.
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