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A stability-oriented monetary policy strategy for the ESCB

13 October 1998

1. At its meeting on 13 October 1998 the Governing Council of the ECB agreed on the main elements of the stability-oriented monetary policy strategy of the ESCB. These elements concern:

  • the quantitative definition of the primary objective of the single monetary policy, price stability;
  • a prominent role for money with a reference value for the growth of a monetary aggregate; and
  • a broadly-based assessment of the outlook for future price developments.

2. As mandated by the Treaty establishing the European Community, the maintenance of price stability will be the primary objective of the ESCB. Therefore, the ESCB's monetary policy strategy will focus strictly on this objective. In this context, the Governing Council of the ECB has adopted the following definition: "Price stability shall be defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%."

Price stability is to be maintained over the medium term.

The current rate of HICP inflation in the euro area is in line with this objective.

Three features of this definition should be highlighted:

  • The HICP is the most appropriate price measure for the ESCB's definition of price stability. It is the only price index that will be sufficiently harmonised across the euro area at the start of Stage Three;
  • by focusing on the HICP "for the euro area", the Governing Council of the ECB makes it clear that it will base its decisions on monetary, economic and financial developments in the euro area as a whole. The single monetary policy will adopt a euro area-wide perspective; it will not react to specific regional or national developments;
  • an "increase (...) of below 2%" is very much in line with most current definitions adopted by national central banks in the euro area.

Furthermore, the statement that "price stability is to be maintained over the medium term" reflects the need for monetary policy to have a forward-looking, medium-term orientation. It also acknowledges the existence of short-term volatility in prices which cannot be controlled by monetary policy.

3. In order to maintain price stability, the Governing Council of the ECB agreed to adopt a monetary policy strategy which will consist of two key elements:

  • money will be assigned a prominent role. This role will be signalled by the announcement of a quantitative reference value for the growth of a broad monetary aggregate. The reference value will be derived in a manner which is consistent with - and will serve to achieve - price stability. Deviations of current monetary growth from the reference value would, under normal circumstances, signal risks to price stability. The concept of a reference value does not imply a commitment to mechanistically correct deviations over the short term. The relationship between actual monetary growth and the pre-announced reference value will be regularly and thoroughly analysed by the Governing Council of the ECB; the result of this analysis and its impact on monetary policy decisions will be explained to the public. The precise definition of the reference aggregate and the specific value of the quantitative reference value for monetary growth will be announced by the Governing Council of the ECB in December 1998;
  • in parallel with the analysis of monetary growth in relation to the reference value, a broadly-based assessment of the outlook for price developments and the risks to price stability in the euro area will play a major role in the ESCB's strategy. This assessment will be made using a wide range of economic and financial variables as indicators for future price developments.

4. This strategy underlines the strong commitment of the Governing Council of the ECB to its primary objective and should facilitate the achievement of this overriding goal. It will also ensure the transparency of the ESCB's decision-making and its accountability. Based on its strategy, the Governing Council of the ECB will inform the public regularly and in detail about its assessment of the monetary, economic and financial situation in the euro area and the reasoning behind its specific policy decisions.


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