##ksbank has enjoyed a fair measure of success in gaining control over domestic price developments, as supported by its strong performance in fighting inflation, and in overcoming a deep recession in the early 1990s. its track record also demonstrates that price stability in sweden was given a high priority long before this was formally recognised by an amendment to the riksbank act at the start of 1999. the eurosystem ’ s stability - oriented monetary policy strategy rests on two pillars, which are both important when the governing council discusses monetary, financial and economic developments at its biweekly meetings. the first pillar, which is a prominent role for money, takes into account the essentially monetary origins of inflation over the medium to long term. it recognises that empirical studies show a stable long - term relationship between money and prices in the euro area. therefore, in the euro area, monetary developments constitute an important guide for the conduct of monetary policy and it is essential to analyse and monitor the development of monetary aggregates closely. the ecb has announced a quantitative reference value for broad monetary growth as measured by m3, the first reference value for m3 growth being set at an annual rate of 4. 5 %. this reference value is consistent with the maintenance of price stability over the medium term, while allowing for sustainable output growth and assuming a trend decline in the velocity of circulation of m3. in setting the reference value for monetary growth, the governing council emphasised its medium - term orientation. substantial or prolonged deviations of current monetary growth from the reference value will normally signal risks to price stability in the medium term. the ecb does not intend to react to deviations of monetary growth from the reference value in a mechanistic way. in the first instance, such deviations are analysed thoroughly to infer any signals which they may give about the prospects for price developments. if the deviation points to a threat to price stability, monetary policy has to react in a manner appropriate to counter this threat. although monetary data contain information which is important for monetary policy decisionmaking, monetary developments alone clearly do not constitute a complete summary of all the economic information necessary for appropriate policy decisions to be taken. thus the governing council emphasises that it is important, in parallel with the assessment of monetary growth, to look at a wide range of financial and other economic indicators, including economic forecasts. the second pillar of the eurosystem ’ s strategy therefore consists of a broadly based assessment of the outlook for price developments and the risks to price

some parts of the euro area do not appear to be in line with the need to encourage higher employment. the eurosystem ’ s monetary policy strategy with regard to the eurosystem ’ s monetary policy strategy, i should like to emphasise that the euro area monetary policy is a single one and therefore indivisible – by definition. monetary policy decisions must be based on area - wide rather than national considerations and hence on area - wide indicators. monetary policy has to be transparent so as to stabilise public expectations of future price developments. in order to clarify how we interpret the mandate conferred on the ecb by the treaty, the governing council has announced a quantitative definition of its primary objective. 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 %. this has to be maintained over the medium term. as the wording ‘ increase ’ makes clear, deflation – that is, a persistent fall in the price level – would not be consistent with price stability. it would not be possible for us to announce where exactly we would draw the dividing line between price stability and deflation. this is partly for reasons that have been described as the measurement bias in consumer price indices. for the united states it was estimated that measured consumer prices tend to slightly overestimate actual inflation. a bias may also exist for the euro area hicp, although its exact magnitude is as yet unknown and needs to be explored further. to maintain price stability, the governing council has chosen a stability - oriented monetary policy strategy. the chosen strategy is forward - looking in nature and also ensures as much continuity as possible with the former strategies of the ncbs. in this respect and with regard to the overriding objective to maintain price stability in an environment of flexible exchange rates, our strategy is broadly similar to that of sveriges riksbank, although there are important differences. in particular, the riksbank follows a direct inflation targeting strategy in which monetary policy is almost exclusively guided by inflation forecasts of about two years ahead. in contrast, the eurosystem relies on two pillars, thereby focusing on the medium term, and does not give such a predominant role to inflation forecasts as the riksbank. in our view, the riksbank has achieved high standards with regard to transparency and accountability, as is for example evidenced by its comprehensive quarterly inflation report. in more recent years, the ri