Pros and cons of different institutional alternatives: banking supervision and macroprudential authority – inside or outside the central bank; 6. A historical perspective on the experience of becoming a modern central bank, a process undergone not only by the NBR. 1. Defining the objectives – the starting point in designing central bank governance It goes without saying that ground zero in building the central bank governance framework is clarifying the objectives it has to pursue. For quite a long time, at least in Europe, “price stability” enjoyed the position of overriding objective, but since the outbreak of the crisis it became obvious that the “inflation first” approach may turn counterproductive in an environment of financial instability. Therefore, financial stability concerns made their way up on central bankers’ agenda. Is that really a novelty? As the representative of an emerging economy central bank that never had the luxury of being concerned exclusively with price stability, I dare say it is not. Actually, central banking has always been about the preservation of, to quote Charles Goodhart, “the three aspects of stability”, namely price stability, (external) currency stability and financial stability. Moreover, the fact that these aspects of stability do condition each other was not discovered in the aftermath of the crisis – central bankers, maybe even more so emergingmarket central bankers, have long been keenly aware that failure to ensure one kind of stability is bound to jeopardise the achievement of the others.
On the other hand, price pressures could become more persistent if supply bottlenecks last longer or wages rise more than is currently anticipated. So far, there is no evidence of significant second-round effects through wages and inflation expectations in the euro area remain anchored, but we continue to monitor risks to the inflation outlook carefully. Monetary policy The ECB’s Governing Council concluded its review of our monetary policy strategy in July. As part of the review, a symmetric 2% inflation target over the medium term was adopted. Our new strategy also recognises the importance of taking into account the effective lower bound on nominal interest rates, which can require especially forceful or persistent monetary policy 1/4  BIS central bankers' speeches  measures. In support of this inflation target and in line with our monetary policy strategy, the Governing Council revised its forward guidance on the key ECB interest rates. We expect them to remain at their present or lower levels until we see inflation reaching 2% well ahead of the end of our projection horizon and durably for the rest of the projection horizon, and we judge that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. Preserving favourable financing conditions over the pandemic period is essential to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability.