Introduction

Primary objective

The primary objective of the ECB’s monetary policy is to maintain price stability. This means making sure that inflation – the rate at which the prices for goods and services change over time – remains low, stable and predictable. To succeed, we seek to anchor inflation expectations and influence the “temperature” of the economy, making sure the conditions are just right – not too hot, and not too cold. We do this through our monetary policy.

The Governing Council considers that price stability is best maintained by aiming for 2% inflation over the medium term. 

What does monetary policy do?

The primary monetary policy instrument is the setting of ECB policy rates, which influence financing conditions and economic developments, thereby contributing to keeping inflation at the ECB’s target level.

The ECB's monetary policy strategy

The ECB’s monetary policy strategy provides a comprehensive framework within which we take our monetary policy decisions and communicate them to the public.

Monetary policy strategy

Decisions and implementation

Each monetary policy decision by the Governing Council is based on an assessment of the monetary policy stance. The assessment of the monetary policy stance determines whether monetary policy is contributing to economic, financial and monetary developments in a way that maintains price stability over the medium term. The appropriate monetary policy stance is delivered by choosing and calibrating the appropriate monetary policy tools, both individually and in combination.

When making monetary policy decisions, the Governing Council systematically assesses the proportionality of its measures. These assessments include an analysis of the benefits and possible side effects of monetary policy measures, their interaction and their balance over time.

The ECB’s main decision-making body, the Governing Council, sets monetary policy for the euro area. The Council consists of six ECB Executive Board members and the Governors of euro area national central banks. They assess economic, monetary and financial developments before taking monetary policy decisions. This happens every six weeks.

After the Governing Council makes monetary policy decisions, it is typically the national central banks which implement them. For example, the national central banks lend money to commercial banks through what we call refinancing operations.

Monetary policy decisions

Monetary policy tools

To help keep prices stable, we need to have the right tools available. Think of a toolbox full of different tools that are used, also in combination, to help us steer inflation. Interest rates are the primary instrument that we use for our monetary policy. In recent years we have added new instruments to our toolbox in response to big changes and large shocks in the economy that have made our task of maintaining price stability more challenging.

Monetary policy instruments

The Treaty

Our mandate is laid down in the Treaty on the Functioning of the European Union, Article 127 (1). The Treaty adds that “without prejudice to the objective of price stability”, the ECB shall also support the general economic policies in the EU with a view to contributing to the achievement of the Union’s objectives as laid down in Article 3 of the Treaty on European Union.

These objectives include balanced economic growth, a highly competitive social market economy aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment – without prejudice to the objective of price stability.

The Treaty states that the ECB shall also contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.

Finally, it states that the ECB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources.