Medium-term orientation

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.

The rationale

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 of time.

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.

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.