jurgen stark : adjusting monetary policy in a challenging environment speech by mr jurgen stark, member of the executive board of the european central bank, at the “ ecb and its watchers xiii ” conference, frankfurt am main, 10 june 2011. * 1. * * introduction ladies and gentlemen, it is a great pleasure for me to be here today at the thirteenth in this series of conferences entitled “ the ecb and its watchers ”. the theme of this session is the return to normality. it assumes that we know what the “ new normal ” will look like. what we do know is that it will be different from the “ old normal ”, as the crisis has changed the economic and financial environment in many ways. but it is still too early to characterise what exactly the new normal will look like, also because the crisis is still ongoing. 1 therefore, rather than talking about going back to normal, i prefer to talk about adjustments to policies. indeed, during the period of acute financial stress we have seen many changes in the area of economic and prudential policies. however, this is far less the case for the ecb ’ s monetary policy. our main objective which is to maintain price stability for the euro area as a whole over the medium term has remained unchanged. of course, exceptional circumstances have called for extraordinary measures. in response to the crisis, we lowered our key interest rates in an unprecedented manner. we have also introduced a number of non - standard measures to support the transmission of our interest rate decisions to the euro area economy. all these measures have lent considerable support to economic activity, while remaining fully aligned with our deep - rooted aim of maintaining price stability. now, economic recovery in the euro area is on a more self - sustained path. looking ahead, we expect the economy to further benefit from ongoing global growth and the still accommodative monetary policy stance. at the same time, for some months by now, we have been observing relatively high inflation rates and continued upward pressure on prices. overall, we see risks to price stability on the upside. this calls for strong vigilance. in this respect, we stand ready to further adjust our still very accommodative monetary policy stance. in the same vein, we will act in a timely manner as regards further steps to phase out our non - standard measures. the concrete steps of adjustment will remain guided by our aim of keeping inflation in the euro area below, but close to, 2

bankers ’ speeches the mro rate will become more relevant again in the future, signalling our monetary policy stance. this implies that the overnight rate will be close to the mro rate. we already see that interbank markets are performing better, as shown for instance by the decreasing dependency of banks on ecb refinancing operations. recourse to these operations has declined significantly from close to €900 billion in june 2010 to around €430 billion today. 5. monetary policy and heterogeneity in public debates, viability of the euro has again been questioned on the ground that the financial crisis has deepened the economic divide across member states. but the ecb ’ s bis central bankers ’ speeches monetary policy continues to be geared towards price stability in the euro area as a whole. the single monetary policy of the ecb cannot address different economic growth or inflation across regions of the euro area. such macroeconomic heterogeneity is a normal feature within a monetary union. heterogeneity can even be a desirable feature when it reflects the necessary adjustments to macroeconomic imbalances that have built up. macroeconomic diversity is an issue that national policy - makers should deal with, not the ecb. their primary contribution of course would be to avoid building up unsustainable macroeconomic imbalances. indeed, the bulk of the current imbalances in some euro area countries reflect that countries have insufficiently internalised the participation in a monetary union into domestic policies. to fully realise the benefits of emu requires national policies to adapt to emu. this applies to the areas of fiscal policy ( including taxation ), structural reforms, regulation and banking supervision. without this, imbalances will inevitably reoccur, challenging the proper functioning of emu and thus of monetary policy. it is essential to put in place a european framework that is incentive - compatible and credibly enforceable, to avoid the re - emergence of significant imbalances. national policies should be fully guided by the framework. does this then imply that monetary policy completely ignores developments in individual euro area countries of the euro area? no, but specific national developments play a role for monetary policy only to the extent that they have an impact on the medium - term outlook and risks for price stability in the euro area as a whole. maintaining price stability for the entire euro area is the central contribution the ecb ’ s monetary policy makes with a view to supporting sustainable economic growth, job