The monetary policy strategy of the Eurosystem in retrospect The ECB Governing Council had three main objectives in mind when it decided to announce a new monetary policy strategy for stage three of EMU in October 1998. First, the strategy should facilitate transparency and accountability, helping the public to understand and assess monetary policy decisions. Second, it also should promote credibility and confidence among euro area citizens that the Eurosystem would keep a clear focus on its constitutional assignment of maintaining price stability. And third, the monetary policy strategy was important for internal decision-making. It should constitute a conceptual framework for structuring information and provide guidance and consistent decision criteria to policymakers, who are constantly confronted with alternative paradigms, limited information and difficult views about the current state and prospects of the economy. Next year will be the 10th anniversary of the creation of the ECB and the announcement of the monetary policy strategy of the Eurosystem. In retrospect, the monetary policy strategy – together with a strong institutional set-up- has provided the right foundations for an effective and successful monetary policy in the euro area. The Governing Council of the ECB has demonstrated that it is well-equipped to take prompt and swift action in order to secure price stability over the medium-term. At the same time, it has retained the appropriate degree of flexibility to respond to shocks and to take into account the unique uncertainties facing the euro area.

However, disruptions in financial markets have increased the uncertainty surrounding this outlook, which poses particular challenges for monetary policy. As a result, the Governing Council has indicated that it will need some time to fully grasp the consequences for its policy stance. From today’s perspective, the modal scenario going forward is one of financial conditions normalising over a period of time, which could be protracted, although some low-probability, more challenging scenarios cannot be totally ruled out at the moment. Under this central scenario, the effects of financial market turbulence on borrowing costs would most likely be contained. In line with that, the consensus view that seems to be emerging among international organisations and private analysts is that, whilst some slowdown of growth may be expected, the overall effects would most likely remain moderate, with the euro area economy continuing to expand at rates close to potential going forward. Nonetheless, downside risks to growth have increased. Other things being equal, a less dynamic growth picture could mitigate the risks to price stability. But, unfortunately, as often happens when we need other things to be equal, they are not. We are currently facing renewed inflation pressures, which come essentially from the dramatic increase of oil and food prices. The concern is that all this could lead to secondround effects in a context in which euro area labour markets have become tighter. It is true that in the recent past we have experienced various episodes of substantial increases in oil prices without negative consequences on underlying inflation.