The European Central Bank last week announced its strategy for the years looking forward to 2025. It is a process that started at the beginning of 2020. The importance of such a strategy lies in the fact the ECB has the responsibility for monetary policy within the eurozone. This means that the strategy and the resulting decisions have a direct impact on our economy.

One example is the rate of interest. For the last years, the ECB has implemented a low interest policy to stimulate economic growth, especially in the larger economies of the eurozone. Given our country’s economic growth, we should have had higher interest rates. However, we did not, given the low interest regime adopted by the ECB.

The scenario since the international financial crisis of 13 years ago and the sovereign debt crisis within the eurozone of 10 years ago has not been positive. Economic growth has been subdued mainly due to slow productivity growth, slower real income growth and a slower population growth. The euro also appeared under a clear threat, leading to the former ECB president’s assertion that the ECB would do anything it takes to support the currency.

The future will also be characterised by other issues such as climate change, environmental sustainability, political conflicts among major powers (I am not sure superpowers still exist), increased cybercrime, possible election of right-wing populist eurosceptic politicians to government in eurozone economies.

All these could represent significant threats to economic and monetary stability.

One of the key elements of the ECB strategy (if not the most important element) is the target inflation rate at two per cent

One of the key elements of the ECB strategy (if not the most important element) is the target inflation rate at two per cent. We have gotten used to an inflation rate which is below the two per cent target. We could all have been very happy with this as that meant prices did not increase in an unsustainable manner and interest rates on borrowing. On the other hand, savers and bondholders have had a very raw deal.

This low inflation rate has also removed space for manoeuvre for the ECB. This is why it had to resort to other tactics such as the purchase of financial assets. This was done to provide further liquidity in the markets. As such, the two per cent inflation rate is seen as a sort of ideal rate that would provide stable economic and employment growth.

Two other important factors to consider are the cost of labour and the cost of raw materials. Part of the wider scenario has also been contained costs of a number of raw materials and commodities, as well as subdued increases in wages. In the past year or so, transport costs have increased significantly. These factors put together have also contributed to low inflation and their evolution in the coming years and months will have a direct impact on the rate of inflation.

Therefore, working towards a target inflation rate of two per cent may not prove to be a piece of cake for the ECB.

Students of economics often find monetary economics rate rather boring as it is not as attractive as fiscal policy which involves the government’s direct intervention in the economy and is, therefore, reflective of the government’s political philosophy. This does not make it any less important. We need to keep in mind that it was the ECB that has kept the euro afloat, and quite successfully so, in the last years. So we should all look forward to how the ECB strategy will be put into practice in the coming years.