stage three have led the governing council to assume that the medium - term trend decline in velocity lies approximately within a range of ½ % to 1 % each year. this range reflects historical experience over the past 20 years. substantial or prolonged deviations of current monetary growth from the reference value should, under normal circumstances, signal risks to price stability in the medium term. monetary policy does not react to deviations of monetary growth from the reference value in a “ mechanistic ” way. in the first instance, such deviations will be thoroughly analysed to infer any signals which they may offer about the prospects for price developments. if the deviation points to a threat to price stability, monetary policy will react in a manner appropriate to counter this threat, rather than attempt to eliminate the deviation of monetary growth from the reference value in the short term. although monetary data contain information which is vital for monetary policy decision - making, monetary developments alone will not constitute a complete summary of all the economic – 4 – information necessary to take appropriate policy decisions. there is a clear need for the governing council to look at a wide range of other economic and financial indicators. at the same time, relying on a single forecast that attempts to summarise all the information available from a wide range of indicators would be misguided. the governing council does not react mechanistically to a single variable - whether this be a forecast, the exchange rate, unit labour costs or fiscal indicators - but rather takes into account the complete picture offered by all available and meaningful leading indicators of future inflation. in this context, the governing council analyses the economic reasons behind the projected risks to price stability. the appropriate monetary policy response to a threat to price stability will depend on the nature of the threat. the governing council can only understand the nature of the risk if it is presented with a full set of data. from these, it can attempt to identify the nature of the disturbance to price stability. having identified the threat, an appropriate policy response can be selected and implemented. internal forecasts of economic activity and inflation in the euro area can also contribute to the success of an appropriately forward - looking monetary policy. however, the eurosystem should not be judged on, or held accountable for, the accuracy of its internal forecasts. thus, publication of the forecasts cannot contribute to accountability. rather, its performance in maintaining price stability in the medium term should be used by the public to judge the success of the eurosystem. allow

the stability - oriented monetary policy strategy of the eurosystem which underlie our single monetary policy. against this background, i shall briefly explain the recent monetary policy decisions adopted by the governing council of the ecb. finally, i shall summarise how we currently see the outlook for maintaining price stability in the euro area. i. the stability - oriented monetary policy strategy the treaty on european union, commonly referred to as the “ maastricht treaty ”, assigns the european system of central banks ( escb ) the primary objective of maintaining price stability in the euro area. in order to steer expectations of future price developments, the governing council has announced a quantitative definition of its primary objective. this clarifies how the treaty ’ s mandate is interpreted by the governing council and gives the public clear guidance concerning its assessment of the success of the single monetary policy. price stability is to be maintained over the medium term. according to the published definition, price stability has been defined as a year - on - year increase in the harmonised index of consumer prices ( hicp ) for the euro area of below 2 %. neither would deflation - that is, a persistent fall in the price level - be consistent with price stability. the annual rate of inflation in the most recent available data of around 1 %, measured on this harmonised basis, is consistent with the definition of price stability. the eurosystem has therefore enjoyed the good fortune to assume authority over monetary policy in the euro area in an environment of price stability, owing to the successful process of disinflation and convergence achieved within europe over the past decade. monetary policy needs a forward - looking, medium - term orientation. this takes into account the fact that monetary policy affects the price level only with variable, usually long and unpredictable time lags. it is not able to control all short - term movements in the price level. to maintain price stability, we have chosen a distinct monetary policy strategy, one that reflects the special circumstances that exist at present as well as those likely to prevail in the foreseeable future. the chosen strategy ensures as much continuity as possible with the former strategies of the ncbs. at the same time, it gives due consideration to the unique situation which will prevail in the early years of monetary union. – 3 – the stability - oriented monetary policy strategy rests on two “ pillars ”. the first pillar is a prominent role for money. this is deemed to be important on account of the