And, if expectation instability should develop nonetheless, being able to refer in communication unambiguously to that objective can – at times and under certain circumstances – provide an effective substitute for tangible action, provided “credible alertness” of the central bank is undisputed by market participants.
Action and vigilance All in all, the art of central banking involves finding a fine balance between action and words in order to react to changing market expectations. The easing cycle that started in 2001 and the instability in inflation expectations that occurred in 2003 represent 2 episodes that illustrate how the ECB has in practice devised its own way to address these issues.