Overview

This chapter describes the monetary policy of the European Central Bank (ECB). Since the start of the monetary union in 1999, the ECB has been responsible for monetary policy making in the euro area. The ECB and the National Central Banks (NCBs) of the EU Member States whose currency is the euro make up the Eurosystem. Under the Maastricht Treaty, the primary objective of the ECB is ‘price stability’. The ECB specifies this objective as inflation ‘below but close to’ 2 per cent in the euro area in the medium term. The ECB has an array of instruments available of which interest rate decisions generally attract most attention. Policy decisions are the outcome of the monetary policy strategy. The ECB has a ‘two-pillar’ strategy that explicitly pairs the discussion of monetary factors (‘monetary analysis’) with a broad-based non-monetary analysis of the risks to price stability in the short to medium run (‘economic analysis’).

During the financial crisis the ECB adopted a number of temporary non-standard measures, subsequently referred to as Enhanced Credit Support. This chapter discusses the ECB’s communication policy. Nowadays, central bank communication is widely believed to enhance the effectiveness of monetary policy. The ECB has always regarded its communication policies as an integral part of its monetary policy.

Learning Objectives

After you have studied this chapter, you should be able to:

• explain the functioning of the ECB

• describe the monetary policy strategy of the ECB

• explain the monetary policy instruments of the ECB

• describe the unconventional policy measures of the ECB taken in response to the crisis

• describe the ECB’s communication policies.