edward scicluna : price stability and beyond – understanding the impact of the ecb ’ s strategy review speech by mr edward scicluna, governor of the central bank of malta, at the finance malta conference, valletta, 20 july 2021. * * * the european central bank ( ecb ) recently published its new monetary policy strategy, following a year - long review process that encompassed multiple layers of stakeholders – including the public. all the monetary policy instruments and concepts were minutely examined by both the experts and the governing council. a number of important changes were made as a result of the review – which was last carried out in 2003. the world has changed since then, and central banks – including the ecb – face numerous new challenges. we need to keep in mind that the ecb ’ s primary mandate – according to the treaty on the functioning of the european union – is price stability. however, the treaty does not specify what price stability means. that is where the ecb ’ s monetary policy strategy comes in, which quantifies price stability and in turn helps to anchor inflation expectations. for some time, the ecb saw high inflation as being the red flag. this is why the target has till now been an inflation rate of ‘ close to but below 2 % ’. what has changed since 2003? structural developments have lowered the so - called ‘ equilibrium real rate of interest ’ – the interest rate that is consistent with inflation at its target rate and where the economy is operating at its optimum. this equilibrium rate has gone down – while in tandem the global economy has had to weather several major shocks, from the global financial crisis to the pandemic. now, low inflation rates are being seen as just as much of a cause for concern and as a result, the target has now been set to 2 % – over the medium - term – and the red flags are not only rates above that, but also rates below it. this decision was aimed at the possibility that the persistent low - inflation environment was being exacerbated by ambiguity about the level of the inflation aim and a perception of the aim being asymmetric. this decision was taken after an extensive assessment of the ecb ’ s unconventional monetary instruments, which looked at which ones were effective in raising output, employment and inflation – as well as how they affected each other. the new symmetric target is straightfoward, clear and unambiguous. this means that it will provide a more solid anchor

. this applies in particular to the financial sector. thus, for example, while participation in european financial markets will present unprecedented opportunities for risk diversification, this also carries with it an increased danger of contagion should weaknesses develop in specific segments of the market. furthermore, the target payment system will facilitate the transmission of financial risks between different institutions operating within member states, calling for extreme vigilance on the part of the central bank of malta and the mfsa. while most sectors of the maltese economy have been exposed to international competition for a number of years now, and while the financial sector incorporates adequate safeguard measures, there is clearly no room for complacency. as hari vittas, alternate executive director for malta ’ s constituency in the imf aptly put it during a recent imf economic forum, “ the potential benefits of monetary integration may be large, but they are not automatic and can easily be wasted in the absence of good policies. ” 1 on balance, however, the benefits of participation in the euro area should more than outweigh the costs, such that over a sufficiently long time span the growth potential of an economy should be higher than it would have been outside the union. this expectation is supported by the results of recent research. an extensive study by andrew k rose of the university of california at berkeley, for example, concludes that a currency union results in approximately a doubling of trade. within the euro zone, moreover, it is estimated that trade volumes have increased by 15 per cent, beyond what can be explained by growth and other factors. recognizing such benefits of emu, many credit rating agencies foresee an upgrade in the ratings of those new member states that are among the first to adopt the euro, 2 although they generally emphasize that what matters is establishing a track record with respect to the implementation of reforms, especially fiscal consolidation. 3 the broader macroeconomic challenge these observations notwithstanding, premature participation in a currency union is nevertheless associated with some potential pitfalls. these result from the loss of monetary and exchange rate policy as a tool for stabilisation purposes. as i will shortly explain, however, the arguments typically advanced against participation in a currency union are not very strong in malta ’ s case. it is sometimes argued, for example, that the maltese economy might be on a different point on the business cycle relative to the euro area, warranting a different monetary policy stance from that of the imf survey. adopting the euro. vol. 33. number 10