And such a winding down was necessary, too, since great macroeconomic imbalances had emerged, reflected most clearly in an unacceptable current account deficit and inflationary pressures. It is therefore inevitable that the output gap will narrow in order to bring down inflation, and that national income will drop even further in order to achieve a significant reduction in the current account deficit, which is far beyond a sustainable long-term level. High interest rates can be painful, not least for the households and businesses that have been imprudent in their consumption and investments recently and have relied too heavily on the facilities of credit institutions. It is out of the question for the Central Bank to base its interest rate policy on the actions of the least prudent members of the community. This can only be based on provisions made in laws and the joint declaration by the Government and the Central Bank this March, i.e. to promote price stability. This is the guiding aim of central bank activities in industrial countries around the world, because it creates a climate for economic growth and greater well-being for citizens. In a world of free capital movements and greatly enhanced access to credit compared with earlier times, businesses and households, and credit institutions too, must find their bearings for themselves. Understandably, many people complain about high interest rates, but the lively debates in recent weeks have often revealed excessive faith in the effect that an interest rate cut would have on economic developments.
BIS Review 95/2001  1  All this was reflected in the Maastricht Treaty. The European Central Bank, which formally began operation in the middle of 1998, enjoys extensive independence and is subject to requirements for transparency and accountability. Even though Sweden is not yet a member of the EMU, it amended legislation on its own Central Bank which now largely fulfils the Maastricht terms. The Bank of England’s legislation does not entirely fulfil the terms of the treaty, but it was granted greatly increased independence a few years ago. Denmark has still not amended its central bank legislation, although this will need to be done in the event of Denmark joining the EMU, not least to give legal sanction to its independence. Price stability is the main objective The Maastricht Treaty set a single objective for the European Central Bank, namely ensuring price stability. Price stability was not defined in the treaty, however; this was done by the ECB itself, which specified it as an annual rise of under 2% in the Harmonised Consumer Price Index. A separate treaty on stability and economic growth stipulates that EMU members should aim for long-term fiscal balance or a surplus, and a public sector deficit of less than 3% of GDP. The decisive viewpoints behind the formulation of the European monetary framework were also dominant in many other parts of the world.