Together, a credible objective and a well-understood reaction function allow financial markets and the public to form reasonable expectations about our future interest rate policy. This in turn gives us the capacity to influence interest rates at longer maturities and steer broader financial and economic conditions. This is what Mike Woodford has called “management by expectations”.
4 In the pre-crisis times, these expectation effects worked relatively smoothly. We had – and still have – a clear objective given to us by the Treaty, price stability. In 1998 we provided a quantitative definition of price stability, clarifying in 2003 that we aimed at inflation rates “below, but close to, 2%” over the medium-term.