Two per cent inflation target
Quantitative target
The ECB’s primary objective is to maintain price stability, that is, to preserve the purchasing power of the euro. We do this by making sure that inflation – the rate at which the overall prices for goods and services change over time – remains low, stable and predictable. The price stability mandate is set out for us in the Treaty on the Functioning of the European Union. Price stability creates conditions for more stable economic growth and a more stable financial system. Trust that the central bank delivers on its price stability mandate gives people and firms more confidence to spend and invest.
The Treaty does not give a precise definition of what is meant by price stability. The ECB’s Governing Council, after concluding its strategy review in July 2021, considers that price stability is best maintained by aiming for 2% inflation over the medium term.
We consider the Harmonised Index of Consumer Prices (HICP) to be the appropriate measure for assessing the achievement of the price stability objective. However, we recognise that the inclusion of costs related to owner-occupied housing in the HICP would better represent the inflation rate that is relevant for households and are working on including those costs in the inflation measure.
Focus on the euro area
The ECB’s inflation target makes clear that the focus of the ECB’s monetary policy is on the euro area as a whole. Therefore, the 2% inflation target is assessed on the basis of inflation developments in the euro area economy.
Reasons for our inflation target of 2%
An inflation rate of 2% is low enough for the economy to fully reap the benefits of price stability while also underlining the ECB’s commitment to the following.
Providing a safety margin against the risk of deflation and making sure monetary policy remains effective when it needs to respond to inflation that is too low. Having a margin against deflation is important because there are limits to how far interest rates can be cut. In a deflationary environment monetary policy may not be able to sufficiently stimulate the economy by using its interest rate instrument. This makes it more difficult for monetary policy to fight deflation than to fight inflation.
Providing a sufficient margin to allow for:
(1) a smoother adjustment of macroeconomic imbalances across euro area countries, avoiding inflation in individual countries persistently falling into negative territory;
(2) downward wage rigidities, which risk raising unemployment excessively; and
(3) a positive measurement bias in the price index, which could imply that the true level of inflation is lower than the measured level.
Avoiding inflation that is too high or too low
We consider negative and positive deviations from our 2% inflation target to be equally undesirable. This target provides a clear anchor for inflation expectations, which is essential for maintaining price stability.
When the economy is operating close to the lower bound on nominal interest rates, it requires especially forceful or persistent monetary policy action to prevent negative deviations from the inflation target from becoming entrenched.
https://www.ecb.europa.eu/mopo/strategy ... ex.en.html
