The Bank of Italy contributes to draft monetary policy for the euro area through the Governor's participation in the Governing Council of the European Central Bank (ECB). As a member of the Governing Council, the Governor exercises his duties in full autonomy and independence, contributing to monetary policy decisions also based on the preparatory activities of the committees and working groups set up within the Eurosystem, which include representatives from the Bank of Italy. In accordance with the principles of decentralization and subsidiarity established at European level, the Bank of Italy also contributes to implement monetary policy.
Objectives and strategy
The primary objective of the Eurosystem (comprising the ECB and the national central banks of the countries that have adopted the euro) is to maintain price stability, as laid down in Article 127 of the Treaty on the functioning of the European Union (formerly Article 105 of the EC Treaty).
Price stability is essential to support the general economic policies of the European Union, which are designed to achieve the objectives of balanced economic growth, full employment and, broadly speaking, individuals' economic well-being.
The ECB Governing Council, following the review of its monetary strategy in July 2021, considers that price stability is best maintained by aiming for two per cent inflation over the medium term.
To maintain the symmetry of its inflation target, the Governing Council recognises the importance of taking into account the implications of the effective lower bound. In particular, when the economy is close to the lower bound, this requires especially forceful or persistent monetary policy measures to avoid negative deviations from the inflation target becoming entrenched. This may also imply a transitory period in which inflation is moderately above target.
Monetary policy is conducted by regulating central banks' liquidity (reserves), which is made available to the banking system in order to satisfy its financing requirements stemming, among other things, from public demand for bank notes and the obligation to fulfil reserve requirements. In establishing the costs of accessing liquidity (see the section on Key ECB interest rates), the central bank sets interest rates on the interbank market, thereby influencing the rates applied by banks to firms and households on deposits and loans. Upholding the principle of decentralization, the Bank of Italy operates with its own counterparties (see the section on Monetary policy counterparties), i.e. with banks that operate in Italy in accordance with the set of instruments, rules and procedures defined by the Eurosystem for implementing monetary policy (operational framework).