Price stability has been pursued with different monetary policy strategies. A successful strategy increases the effectiveness of monetary policy.
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Euro area inflation has been slow in recent years. The way slow inflation was explained before the crisis has been challenged.
By promising low interest rates in the future, a central bank can provide stimulus for the economy today. The effectiveness of this kind of forward guidance can be assessed by the impact it has on market expectations regarding interest rates.
Estimated on the basis of inflation swaps, euro area inflation expectations have increased. Interpretation of inflation swaps is not, however, a straightforward matter, as the price of an inflation swap can be affected by, for example, its risk level.
The expanded asset purchase programme has also had a significant effect on price developments: in its absence, inflation in 2016 would have been much slower.
Euro area inflation has long been below the European Central Bank’s objective for price stability and has continued to slow in recent months. This has given rise to heightened concerns that the euro area could soon be facing a prolonged period of deflation, as recently in Japan.