During this period one could say that the central banks’ original task of guaranteeing the value of the means of payment was neglected as other tasks, primarily affecting demand in the economy, were perceived as more important and more interesting for monetary policy. The consequence was that the nominal anchor was relinquished and to establish it again proved to require considerable effort. Let me before I discuss the other important component of an efficient payment system – financial stability – say something about the most common approaches to attaining price stability. There are currently two predominant means of trying to ensure that inflation remains at a low and stable level. One is to tie one’s own currency to the currency of a country with a long tradition of low and stable inflation. The fixed exchange rate thus becomes an intermediate target through which one hopes to attain the ultimate target – price stability. The other means is to allow the exchange rate to float and to give the central bank the task of acting more directly to attain low, stable inflation – what is known as inflation targeting. The changeover in monetary policy made by Sweden at the beginning of the 1990s meant that we switched from the first method, fixing the exchange rate, to the second, targeting inflation. The reason was quite simply that the fixed exchange rate had not functioned very well as a means of keeping down inflation and establishing a nominal anchor in the economy.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.8% in February 2013, down from 2.0% in January. The on-going decline in annual inflation rates mainly reflects the energy and food components of the price index. Looking ahead, while the monthly pattern of headline inflation rates may be somewhat volatile, underlying price pressures should remain contained given the environment of weak economic activity in the euro area. Inflation expectations are well-anchored and in line with price stability over the medium term. The March 2013 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 1.2% and 2.0% in 2013 and between 0.6% and 2.0% in 2014. In comparison with the December 2012 Eurosystem staff macroeconomic projections, the ranges are broadly unchanged. In the Governing Council’s assessment, risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity. Turning to the monetary analysis, monetary figures for January 2013 support our assessment that the underlying pace of monetary expansion continues to be subdued. The annual growth rate of M3 remained broadly unchanged at 3.5% in January, after 3.4% in December 2012. The annual rate of growth of the narrow monetary aggregate, M1, increased to 6.7% from 6.3% in December 2012.