Therefore, the money supply provides a natural “nominal anchor” for a monetary policy aiming at the safeguarding of price stability. To emphasise the prominent role assigned to money, the Governing Council of the ECB has announced a quantitative reference value for monetary growth in terms of the broad definition of M3. The second pillar of the monetary policy strategy is founded on a broadly based assessment of the outlook for price developments in the euro area as a whole. This assessment is made using a wide range of indicators. In particular, those variables which may provide information on future price developments are thoroughly analysed. These analyses should not only provide information on the risks for price developments but should also help to determine the cause of unexpected changes in important economic variables. In view of this policy stance and the published definition of price stability, the monetary policy strategy of the Eurosystem bears some resemblance to that of the Swiss National Bank. Allow me to quote the President of the Swiss National Bank who outlined the strategy of the Swiss National Bank as follows: “We try to meet the price stability objective by following developments in the monetary aggregates, but also, at the same time, taking into account other indicators.” [See the paper by Hans Meyer entitled “Zur Geldpolitik im neuen Jahr”, from the seminar held on 21 January 1999 at the University of St. Gallen.] However, the motives for developing these respective strategies were different.
The publication of this definition also provides the public and the European Parliament with clear criteria for assessing the success of the single monetary policy, thereby rendering the Eurosystem and its policy both transparent and accountable. The Eurosystem defines price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2% to be maintained over the medium term. The wording “below 2%” clearly delineates the upper boundary for the measured rate of inflation that is consistent with price stability. At the same time, in this context, the use of the word “increase” implies that deflation – i.e. a prolonged decline in the price level – is not consistent with price stability. The price stability objective must be achieved both in the medium term and the long term. On the one hand, this objective has been set in order to take into account the variable and somewhat unpredictable time lags affecting monetary policy. On the other, it is a reflection of the possible emergence of short-term volatility in prices resulting from non-monetary shocks that cannot be controlled by monetary policy. Stability-oriented monetary policy strategy of the Eurosystem The monetary policy strategy of the Eurosystem is geared towards price stability within the euro area and can basically be described as a two-pillar strategy. The first pillar assigns a prominent role to money as defined by the broad monetary aggregate M3. There is wide consensus that medium-term inflation is actually a monetary phenomenon.