The main objective of the Eurosystem’s monetary policy is to maintain stable prices in the euro area. Price stability is defined as an annual rate of increase in consumer prices below, but close to 2% over the medium term. Here, the value of money is held more or less unchanged and strong purchasing power is preserved.
The Eurosystem is composed of the national central banks in the euro area and the European Central Bank (ECB). As a member of the Eurosystem, the Bank of Finland participates in the preparation, decision-making and implementation of the euro area's single monetary policy. Bank of Finland Governor Olli Rehn is a member of the Eurosystem's highest decision-making body, the ECB Governing Council.
Price stability is the foundation for sustainable economic growth. When inflation, i.e. the annual rate of growth in consumer prices, remains below, but close to 2% over the medium term, the value of money is held more or less unchanged and strong purchasing power is preserved.
The Eurosystem maintains price stability by controlling its key interest rates, which determine the costs banks face when borrowing money from or making deposits with the central bank, and by using so-called non-standard monetary policy measures.
The Governing Council eased its monetary policy in a number of ways in 2019
In 2019 inflation remained muted in the euro area and inflation expectations remained low.
The Governing Council responded to the weak economic situation by easing its monetary policy several times, using a variety of measures. Accommodative monetary policy ensures that financing conditions will remain favourable for all sectors of the economy.
In 2019, the Governing Council lowered the ECB's deposit facility rate to -0.5%, changed its forward guidance, launched a third series of targeted longer-term refinancing operations, adopted a two-tier system for reserve remuneration and restarted its net purchases under the asset purchases programme (at a monthly pace of EUR 20 billion). Net purchases were initially ended in December 2018.
In December ECB President Christine Lagarde announced that the ECB would conduct a strategy review of its monetary policy framework. The review aims to ensure that the ECB has the best possible basis for fulfilling its mandate and serving the best interests of all euro area citizens.
Monetary policy will remain accommodative in the coming years
In 2019, the ECB’s monetary policy for the euro area remained accommodative to growth. The accommodative monetary policy contributes to maintaining very favourable bank lending conditions and supports access to financing across all economic sectors. The object of this monetary policy is to support the convergence of inflation to a level below, but close to, 2% over the medium term.
At the end of 2019, euro area growth was continuing at a muted pace and inflation remained low. However, the Eurosystem staff projections published in December were still forecasting that inflation would accelerate closer to the objective in the coming years.
The Governing Council stressed that a high degree of monetary accommodation will continue to be needed for an extended period of time.
Money market reference rates revised in 2019
Reference (or benchmark) rates are publicly accessible interest rates that serve, among other things, as a basis for loans, derivatives and other financial contracts. Eonia and Euribor are the most commonly used reference rates in the EU and were both revised in 2019.
The European Central Bank began to publish €STR, a new overnight benchmark rate, alongside the Eonia from the beginning of October. The Euribor, in turn, had its calculation methodology revised. The revised Euribor was fully adopted in the fourth quarter of 2019.
The Bank of Finland participated closely in the policy preparation work for €STR in 2019, and is involved in the benchmark’s continuous quality management.