Taking account of this uncertainty is particularly important in the case of the euro area, whose “deep structural parameters” are somewhat uncertain to the extent that the inception of the euro may have been associated with a “regime shift”. More prosaically, this medium-term orientation of the single monetary policy recognises that it is impossible for a central bank to control price developments with accuracy over the short-term. The second implication is that the relevant indicators for monetary policy must reflect, almost exhaustively, the main sources of both short and long-term inflation. In the light of this, the monetary policy strategy seeks, as far as possible, to rely on a “full information approach”. This is what the concepts economic analysis and monetary analysis – also known as the two-pillar approach – used notably at the press conferences given by the ECB President following monetary policy decisions, reflect: - the economic analysis examines cyclical, economic and financial indicators related to the main determinants of short-term inflation;  4  BIS Review 4/2006  - the monetary analysis, is based on a monetary explanation of long-term inflation. It is signalled by the announcement of a reference value, which is not a committing target, of 4½% for the annual growth of the broad money aggregate. - The medium-term orientation of the single monetary policy makes necessary the cross-checking of these two complementary approaches. From this point of view, the ECB’s monetary policy strategy is more comprehensive than pure inflation or monetary targeting strategies.

PART 1: The main features of the Eurosystem monetary policy strategy Let us see what are the main features of the single monetary policy, conducted by the Eurosystem, in terms of institutional and operational framework as well as on strategic issues themselves. 1. The institutional and operational framework is founded on modern concepts Let me recall first that over the past decade, a large body of literature has been devoted to questions surrounding central bank independence, the concepts of transparency and monetary strategies, and the communication of monetary policy decisions. Drawing on this analytical expertise and the experience of the national central banks of the participating countries, the Eurosystem is first and foremost based on a modern institutional framework, founded on the principles of independence, transparency and accountability and, lastly, operational decentralisation. 1.1. The independence of the Eurosystem fosters price stability The Eurosystem’s primary objective, as enshrined in the Maastricht Treaty, is to achieve and maintain price stability. As many empirical studies have shown, a country’s ability to fight inflation appears very closely correlated to the degree of independence of its central bank. The independence of the European Central Bank and the 12 national central banks of the Member States of the euro area is therefore anchored in the Treaty. In operational terms, this means that, in the conduct of their duties, neither the European Central Bank nor the national central banks of the Eurosystem may request or take instructions from the Community institutions, national governments or any other body.