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15/10/2020

Beyond “Whatever it takes”: The ECB reviews its monetary policy strategy

An article by Dr Mario Vella, Governor of the Central Bank of Malta, as published in the Times of Malta and The Malta Business Weekly on 15 October 2020.

Let’s admit it, the language of central banks is often not sufficiently user friendly towards the general public. The European Central Bank’s president, Christine Lagarde, speaking at the 12th ECB and its Watchers conference on 30 September 2020 in Frankfurt, made no bones about it.

“We must explain much better to the general public what we are doing and why, and we must talk to people that we do not normally reach. This imperative has to cascade through all the elements of our review: our inflation aim, our inflation measure, our tools and their effectiveness, and how we take into account new challenges that people care about, like climate change or inequality. […] Monetary policy can only be credible if we ensure that our goals are truly understood and shared by the people we serve. As an independent central bank, we are and will remain accountable to them.”

Monetary policy is one of the principal levers of economic policy. It encompasses the use of tools aimed at influencing developments in money and credit, normally through changes in interest rates. Maintaining price stability, or the rate of inflation consistent with sustainable output and employment levels, is widely seen as the most important contribution that monetary policy can make to the welfare of citizens.

Malta adopted the euro as its currency in January 2008. Since then, responsibility for monetary policy lies with the European Central Bank (ECB). The Central Bank of Malta, together with all the other euro area central banks, contributes to the formulation and implementation of monetary policy. As Governor of the Central Bank of Malta, I bear the responsibility of membership of the Governing Council, the highest decision-making body of the ECB.

On 23 January of this year, the Governing Council launched a review of its monetary policy strategy, the aim of which is to deliver price stability, the ECB’s primary aim, as is set out in the Treaty on the Functioning of the European Union. More specifically, the ECB aims to maintain inflation rates below, but close to, 2% over the medium term. The ECB’s monetary policy strategy was first adopted in 1998 and some of its elements were clarified in 2003.

However, since 2003, the euro area and the world economy have been undergoing profound structural changes. Economic growth has weakened, reflecting slowing productivity and ageing populations. Together with the impact of the global financial crisis (2007-2008) and of the COVID-19 pandemic, this has led interest rates to fall to unprecedented levels. In turn, this has reduced the space for the ECB and other major central banks to ease monetary policy by using conventional instruments, such as interest rate cuts, in response to inflation persistently below their objective. Too low inflation is problematic because it acts as a drag on economic growth. In contrast, in the past tackling high inflation was a more pressing issue. The threat to environmental sustainability, accelerating digitalisation, globalisation, and developments in the financial system have also changed the environment in which monetary policy operates.

As part of the strategy review, the Governing Council will take stock of how monetary policy strategy has supported the implementation of the ECB’s mandate. The formulation of the price stability objective, including the level of the inflation aim, and the flexibility of the horizon to achieve it, will figure prominently in this exercise.

The review will also take into account how other considerations – such as financial stability, employment and environmental sustainability – can be taken into account in pursuing the ECB’s mandate. The Governing Council will review the effectiveness and the potential side effects of the monetary policy instruments it has deployed over the past decade. It will examine how the economic and monetary analyses, through which the ECB assesses the risks to price stability, need to be updated. The Governing Council will also explore the interaction between monetary and fiscal policy. Last but certainly not least, it will review its communication practices. The strategy review should be concluded by mid-2021.

The ECB, together with all the central banks of the euro area, will engage with a variety of stakeholders, including members of the European Parliament, academics and representatives of civil society. The ECB itself will host a listening event for members of civil society on 21 October 2020.

On its part, the Central Bank of Malta will be organising two listening events towards the end of this year aimed at the social partners, civil society groups and the general public with a view to understand their perceptions of and views about the ECB’s monetary policy. The feedback we receive will provide meaningful input to the deliberations of the Governing Council.

In July 2012, Mario Draghi uttered his resounding “Whatever it takes” declaration. It worked. His words showed the importance of effective communication for central banks. We will treasure this experience.

The CBM will be holding a virtual public listening event on December 14, during which a presentation will be delivered by the Bank, following which stakeholders will be given the opportunity to give their views. Further details will be available in due course. However, feedback and requests for participation may already be sent via email.

ECB Strategy Review

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