Reviewing the ECB’s monetary policy strategy

In early 2020, we at the Governing Council of the European Central Bank, which comprises the governors of the euro area national central banks and the ECB Executive Board members, decided to review the monetary policy strategy of the ECB. On July 7, the Governing Council concluded the strategy review. I wish to take this opportunity to share my views, since our decisions at the ECB have implications for the economy of the euro area and in a broader context.

The monetary policy strategy of the ECB sets the main principles and tools that guide and support the Eurosystem in the fulfillment of its mandate, which is to keep prices stable. The strategy is instrumental in our effort to preserve the value of the euro, to support economic growth and the creation of jobs, and to promote social welfare and cohesion.

A regular review of the monetary policy strategy is important in order to ensure it remains fit for purpose, against a backdrop of constantly evolving conditions. In the nearly two decades since our last review in 2003, the economic environment has changed significantly, whereas deep crises have shaken the world economy.

Structural changes such as the slowdown in productivity growth, the population aging due to demographic developments, and globalization have impacted on economic activity and the evolution of wages and prices.

Rapid technological progress has also affected economic activity, as well as wages and prices.

The global financial crisis and the subsequent sovereign debt crisis in the euro area in the past decade, coupled with the current pandemic crisis, have dampened economic growth and inflation across all euro area member-states, including Greece.

In response to the aforementioned significant challenges and unprecedented developments, we have substantially eased our monetary policy in the past decade, driving the key ECB interest rates to historically low levels and adopting nonconventional monetary policy instruments. With such drastic measures, we succeeded in raising both inflation and economic growth from significantly low levels. Still, as evidenced in our latest projections in June, we have not yet managed to achieve convergence of medium-term inflation rates toward levels consistent with price stability.

The review of key elements of our monetary policy strategy has thus been warranted in order to ensure that the strategy will continue to support the fulfillment of our mandate to maintain price stability in the years to come. In the review process, we took into account the fundamental changes that have taken place in our economic environment, so that the new strategy remains appropriate under different circumstances. At the same time, our aim has been to provide a strong anchor for the inflation expectations of consumers and businesses, to facilitate well-informed decision-making.

In the following, I will focus on some of the main topics examined during the past few months.

The revised strategy determines that price stability is best maintained by aiming for a 2% increase in the Harmonized Index of Consumer Prices over the medium term. Compared to the previous definition, this amended formulation indicates clearly that the 2% inflation rate is not a ceiling, but our symmetric target.

At the same time, in the new strategy it is emphasized that both the continuous rise and the prolonged decline of inflation need to be avoided as much as possible. Especially under conditions of very low interest rates, similar to those prevailing currently, the intensive and persistent use of monetary policy measures, such as asset purchases, targeted longer-term refinancing operations and forward guidance, aims to avoid negative deviations from the inflation target becoming entrenched. This may also imply a transitory period in which inflation is moderately above the 2% target.

With a view to addressing the challenges implied by the impact of climate change on price stability, in a landmark decision, the Governing Council of the ECB has committed to an ambitious climate-related action plan. With this action plan, the Eurosystem aims, within its mandate, to ensure that it fully takes into account in the implementation of monetary policy climate change-related risks and the implications of transition policies toward a low-carbon economy. The plan entails a comprehensive incorporation of climate factors in our macroeconomic modeling tools as well as the development of new climate-related statistical indicators. In addition, the plan envisages action in order to adapt the monetary policy operational framework along four main pillars, namely a) disclosures, b) risk assessment, c) corporate sector asset purchases and d) the collateral framework.

Let me stress at this point that the Bank of Greece is one of the first central banks globally to respond to the issue of climate change and sustainability. Already in 2009 it had set up the interdisciplinary Climate Change Impacts Study Committee which has been systematically engaged in the study of the risks and opportunities emerging from climate change. More recently, the Bank of Greece established a Center for Climate Change and Sustainability with a view to coordinating and implementing the bank’s climate agenda.

I consider the review of the monetary policy strategy as a unique occasion to take stock of the lessons learnt during the past two decades, and to efficiently improve our ability to fulfill our primary objective in the future. At the same time, it has enhanced the Eurosystem’s communication with the outside world, supporting open dialogue with citizens, both by hearing and being heard. This has also been facilitated by the public listening events hosted by the Bank of Greece and the other national central banks in the euro area, as well as by the ECB.

Under the new strategy, I am confident that we shall be better prepared to deal with future economic disturbances. The central banks of the euro area countries will be able to respond in a more timely and efficient manner to economic developments, and to maintain favorable financial conditions, in order to keep prices stable. In this way, we will continue to contribute to sustainable economic growth, thereby improving the welfare of all European citizens, including the citizens of Greece.

Yannis Stournaras is the governor of the Bank of Greece and a member of the European Central Bank’s Governing Council.