The European Central Bank said today it would aim to keep euro zone inflation close to 2 per cent in the future, effectively loosening its strict definition of price stability.
"The Governing Council agreed that in the pursuit of price stability it will aim to maintain inflation rates close to two per cent over the medium term," ECB President Mr Wim Duisenberg said in a news conference following its decision to leave interest rates unchanged at 2.5 per cent.
This would provide the ECB with a safety margin to guard against the risk of deflation, a threat also addressed by the US Federal Reserve earlier this week.
But Mr Duisenberg said the ECB had not changed the definition of price stability as price rises "below 2 per cent", that it has adopted ever since it took the monetary reigns in the euro zone.
It would also stick to its much-criticised two-pillar strategy, in which it gives a prominent role to money supply growth as an inflation indicator.
However, it will put less emphasis on the much-criticised monetary pillar by saying it would first discuss real economy indicators in explaining its interest rate decisions. It then would look at money in the longer term to cross check the inflationary pressures.
Economists had expected no major changes from the five-month policy review, but they had been closely watching whether the ECB would make any adjustments to its inflation measure.