Edward Scicluna: Price stability and beyond - understanding the
impact of the ECB's Strategy Review
Speech by Mr Edward Scicluna, Governor of the Central Bank of Malta, at the Finance Malta
conference, Valletta, 20 July 2021.
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The European Central Bank (ECB) recently published its new monetary policy strategy, following
a year-long review process that encompassed multiple layers of stakeholders - including the
public. All the monetary policy instruments and concepts were minutely examined by both the
experts and the Governing Council.
A number of important changes were made as a result of the review - which was last carried out
in 2003. The world has changed since then, and central banks - including the ECB - face
numerous new challenges.
We need to keep in mind that the ECB's primary mandate - according to the Treaty on the
Functioning of the European Union - is price stability. However, the Treaty does not specify what
price stability means. That is where the ECB's monetary policy strategy comes in, which
quantifies price stability and in turn helps to anchor inflation expectations.
For some time, the ECB saw high inflation as being the red flag. This is why the target has till
now been an inflation rate of 'close to but below 2%'.
What has changed since 2003? Structural developments have lowered the so-called 'equilibrium
real rate of interest' - the interest rate that is consistent with inflation at its target rate and where
the economy is operating at its optimum. This equilibrium rate has gone down - while in tandem
the global economy has had to weather several major shocks, from the Global Financial crisis to
the pandemic.
Now, low inflation rates are being seen as just as much of a cause for concern and as a result,
the target has now been set to 2% - over the medium-term - and the red flags are not only rates
above that, but also rates below it. This decision was aimed at the possibility that the persistent
low-inflation environment was being exacerbated by ambiguity about the level of the inflation aim
and a perception of the aim being asymmetric.
This decision was taken after an extensive assessment of the ECB's unconventional monetary
instruments, which looked at which ones were effective in raising output, employment and
inflation - as well as how they affected each other.
The new symmetric target is straightfoward, clear and unambiguous. This means that it will
provide a more solid anchor for longer-term inflation expectations. In practice, it will require
especially forceful or persistent monetary policy action in a way to avoid negative deviations from
becoming entrenched.
There was also discussion during the review with regards to the primary mandate and its context
within the Treaty's requirement to support the general economic and social policies of the
European Union. The changes made to the monetary policy strategy will look at both aspects of
this spectrum.
Of course, the strategy review made other important changes. For example, the Governing
Council has recommended that owner-occupied housing will in due course be included in the
Harmonised Index for Consumer Prices.
The ECB also understands the importance of factoring in the impact of climate change. There is
now an action plan on how the ECB will more systematically reflect climate change
considerations in its monetary policy operations.
This is not only about the moral imperative. Bear in mind that the physical and transition risks
related to climate change affect not only price stability but also financial stability, having an
impact on the value as well as the risk profile of assets held on the Eurosystem's balance sheet.
This is why the ECB will enhance its analytical and macroeconomic modelling capacities, while
developing appropriate statistical indicators.
Another aspect to emerge from the review was the importance of communication. Monetary
policy communication has become a tool in its own right - and the communication needs to be
understood not only by experts but also by the public if the ECB wants it to be effective. A
number of changes will be made to the statements issued following monetary policy decisions,
which should achieve this aim.
And last but not least, the extensive feedback received from the review process has highlighted
the importance of the exercise given the rapid changes in the global economy. The new review
should not wait another 18 years. The Governing Council is committed to reviewing its monetary
policy strategy at regular intervals, with the next assessment taking place in 2025.