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Strategy
The main objective of the monetary policy of the European Central Bank (ECB) is to maintain price stability. This objective relates to the euro area overall, and not to the price development in the individual euro area member states. The ECB has defined price stability as an annual increase in the harmonised index of consumer prices in the euro area, HICP, of less than 2 per cent in the medium term. The ECB aims to maintain inflation rates close to 2 per cent in the medium term.
The ECB's monetary-policy decisions are based on an economic analysis and a monetary analysis. The former is an analysis of a wide range of financial and real-economic indicators to identify short to medium-term risks to price stability. The latter comprises an analysis of a number of monetary indicators, including M3 and loans in the euro area, to assess medium to long-term trends in inflation.
Instruments
The ECB conducts its monetary policy via the monetary-policy counterparties that comprise credit institutions in the euro area. ECB's main monetary-policy instruments comprise:
- Refinancing operations. The major part of the liquidity for credit institutions in the euro area is allocated via the main refinancing operations, which are conducted as weekly auctions of liquidity with a maturity of 7 days. The liquidity is allocated against accepted collateral.
- Standing facilities. Via the deposit facility and the marginal lending facility the monetary-policy counterparties can deposit and acquire liquidity on a day-to-day basis. Liquidity from the marginal lending facility is allocated against accepted collateral.
- Reserve requirements. Credit institutions in the euro area must deposit an amount equal to 2 per cent of selected balance-sheet liabilities with the national central banks. The reserve requirements are mainly aimed at stabilising the day-to-day interest rate in the euro area.
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