France - Lending Rate

The monetary policy strategy of the European Central Bank (ECB) provides a comprehensive framework within which decisions on the appropriate level of short-term interest rates are taken. It is based on some general principles that aim to ensure a successful conduct of monetary policy.

The ECB’s monetary policy strategy comprises:

• a quantitative definition of price stability, and
• a two-pillar approach to the analysis of the risks to price stability.

The external communication of the strategy reflects the diversified approach to monetary policy that the ECB has adopted for its internal decision-making.

• Measurement: Percent per annum (% p.a.)
• Adjustment: Not seasonally adjusted (NSA)
• Native frequency: Daily (7 days per week)
• Start date: Uniformly 1 Jan 1999

The first element of the ECB’s strategy is a quantitative definition of price stability. The ECB’s Governing Council has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

Price stability is to be maintained over the medium term.

The Governing Council has clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.

Objectives of monetary policy

To maintain price stability is the primary objective of the Eurosystem and of the single monetary policy for which it is responsible. This is laid down in the Treaty on the Functioning of the European Union, Article 127 (1).

"Without prejudice to the objective of price stability", the Eurosystem shall also "support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union". These include inter alia "full employment" and "balanced economic growth".

The Treaty establishes a clear hierarchy of objectives for the Eurosystem. It assigns overriding importance to price stability. The Treaty makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment.

These Treaty provisions reflect the broad consensus that: 

• the benefits of price stability are substantial. Maintaining stable prices on a sustained basis is a crucial pre-condition for increasing economic welfare and the growth potential of an economy.
• the natural role of monetary policy in the economy is to maintain price stability. Monetary policy can affect real activity only in the shorter term. But ultimately it can only influence the price level in the economy.

Scope of monetary policy

The central bank is the sole issuer of banknotes and bank reserves. That means it is the monopoly supplier of the monetary base. By virtue of this monopoly, it can set the conditions at which banks borrow from the central bank. Therefore it can also influence the conditions at which banks trade with each other in the money market.

In the short run, a change in money market interest rates induced by the central bank sets in motion a number of mechanisms and actions by economic agents. Ultimately the change will influence developments in economic variables such as output or prices. This process – also known as the monetary policy transmission mechanism – is highly complex. While its broad features are understood, there is no consensus on its detailed functioning.

Copyright

Copyright © European Central Bank, Frankfurt am Main, Germany.

Data taken from the ECB's website. The information may be obtained free of charge through the ECB's website: https://www.ecb.europa.eu/mopo/strategy/html/index.en.html.