Monetary policy cannot offset short-term changes in inflation from shocks to the economy, European Central Bank (ECB) executive board member Jose Manuel Gonzalez-Paramo said today.
"The medium-term horizon implies accepting and communicating to the public that monetary policy cannot offset short-term changes in the inflation rate caused by economic shocks" such as sharp oil price changes, he said in a speech to a symposium in Osaka, western Japan.
Mr Gonzalez-Paramo said the euro zone inflation rate has occasionally moved above a 2 per cent ceiling as a result of temporary shocks such as the recent sharp rise in oil prices.
"In the presence of such shocks, however, what is important from the monetary policy perspective is that price stability was maintained over the medium term, in other words, once the shock had disappeared," he said.
In a speech in Madrid on October 19th, he said it was probable that average euro zone inflation would be slightly above 2 per cent by the end of 2006 and that this could be repeated in 2007.
Consequently, the ECB had to maintain very close monitoring of inflation, he said in that speech. On currency integration in the euro zone, he said the euro was created to provide macroeconomic stability to the region, not to become a "global champion".