EUROPEAN CENTRAL BANK'S MONETARY POLICY STRATEGY

Pursuant to Article 2 of the Statute of the European System of Central Banks (ESCB), the primary goal of the ESCB and the European Central Bank (ECB) is price stability. In addition, the ESCB supports the achievement of other economic policy objectives in the European Union as long as price stability is maintained. In striving for the goals, the ESCB follows the principles of free market economy, free competition and effective resource allocation.

The founding treaty of the European Union gives the European System of Central Banks and thus also the Eurosystem a relatively extensive institutional independence in executing their mandates, that is ensuring the price stability. This entails a requirement of sufficient transparency and accountability to the European Parliament.

On October 13, 1998, the Governing Council of the European Central Bank announced the monetary policy strategy to be implemented in order to ensure (price) stability since the beginning of the third stage of the Economic and Monetary Union; i.e., since 2002. An updated version of this strategy with additional explanations was published on May 8, 2003. The strategy includes a quantitative definition of the price stability goal and explanations concerning the two pillars of the strategy - economic analysis and monetary policy analysis.

The central part of the European Central Bank's monetary policy strategy is the quantitative definition of price stability: price stability is a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

Analytical framework for the assessment of risks to price stability

Economic analysis focuses on the assessment of economic development and related short- and medium-term risks. This includes the analysis of potential unexpected economic shocks in the euro area and the forecasts of key macroeconomic indicators.

Monetary policy analysis focuses on the assessment of medium-term risks to price stability. Attention is paid to relatively many indicators, including changes in the broad monetary aggregate (M3) and its components as well as loan and liquidity indicators. The results of monetary policy analysis are primarily used for double-checking the accuracy of the short/medium-term outlook against the medium/long-term perspective.