In these situations, other policy levers – such as domestic fiscal policy, and national macro-prudential policy – become even more important for ensuring domestic economic and financial stability. In 2021, following a wide-ranging monetary policy strategy review, the Governing Council reaffirmed that price stability is best maintained by aiming for 2% inflation over the medium term.
The medium term horizon is important for two reasons. First, it allows for flexibility in responding to economic shocks, and also to take account of uncertainties in both the inflation process and the transmission of policy. Second, it allows for the possibility of temporary shocks dissipating of their own accord, without policy inducing unnecessary volatility in output and employment.