The Eurosystem is responsible for the single monetary policy of the euro area. The main objective of monetary policy is to keep prices stable in the euro area, so that the value of money is held more or less unchanged and strong purchasing power is preserved. Monetary policy decisions are guided by the monetary policy strategy of the European Central Bank, and a review of this strategy was initiated in 2020.
The Eurosystem comprises the European Central Bank (ECB) and the national central banks of the euro area. As a member of the Eurosystem, the Bank of Finland participates in preparation, decision-making and implementation of the euro area's single monetary policy.
The Bank of Finland is responsible for implementing the Eurosystem's monetary policy in Finland.
The Governing Council maintains price stability using monetary policy tools
The main objective of monetary policy is to maintain price stability. This is important, as here the value of money is held more or less unchanged and strong purchasing power is preserved.
The ECB currently defines price stability as meaning a rate of annual inflation below, but close to 2% over the medium term. Price stability is the foundation for sustainable economic growth.
The Eurosystem's most important tools for implementing monetary policy are setting the key ECB interest rates, longer-term refinancing operations for banks, and asset purchases. Since the key ECB interest rates are already very low, asset purchases have played a more prominent role in the implementation of monetary policy.
Monetary accommodation has helped businesses and households through the worst of the crisis
In 2020, euro area output growth contracted and inflation expectations and actual inflation declined sharply due to the COVID-19 pandemic.
The Governing Council acted on the weak outlook by easing its monetary policy multiple times, using several tools to implement its policy stance. The goal of monetary policy has been to help households and businesses through the worst of the crisis and lay a foundation for recovery after the crisis.
Among other measures taken during the year, the ECB held its deposit facility rate at −0.5%, eased the collateral requirements for central bank loans increased its asset purchases and conducted its longer-term refinancing operations on more favourable terms.
Targeted longer-term refinancing operations (TLTROs) constituted an important part of the Eurosystem's response to the economic crisis caused by the COVID-19 pandemic in 2020. These longer-term loans saw a particularly high take-up from banks.
In addition to the Eurosystem's joint collateral policy decisions, the Bank of Finland implemented a number of domestic measures in 2020 to support the availability of collateral for its own counterparties and to facilitate the flow of finance to businesses and households.
In its forward guidance, the Governing Council emphasised the need for a sustained period of accommodative monetary policy. An accommodative monetary policy stance helps preserve favourable financing conditions for all sectors of the euro area economy.
European Central Bank began to revise its monetary policy strategy
The Governing Council of the European Central Bank launched a review of its monetary policy strategy in January 2020.
The strategy review has been prompted by changes in the economic environment. The historically low level of interest rates has hampered the ability of central banks to respond to negative surprises in the economy. The economic environment is also being reshaped by population ageing, weak productivity, digitalisation and climate change.
The strategy review will encompass the formulation of price stability, the monetary policy toolkit and its effectiveness, economic and monetary analyses and the ECB’s communication practices.
Other considerations, such as financial stability, globalisation, employment and environmental sustainability, will also be part of the review.
There are thirteen work streams focusing on specific areas of the strategy review. Each work stream has a representative from the Bank of Finland. Research by the Bank of Finland has contributed significantly to the assessment work underpinning the strategy review.
The review will be based on thorough analysis and open minds, engaging with all stakeholders.
The Bank of Finland held three listening events in 2020, fully open to the public, to better understand what the public feels is important in renewing the monetary policy strategy.
The strategy review is due to be completed by the middle of 2021.