The two pillars – another compromise

After the European Central Bank’s May rate cut debacle, arguments resurfaced that communication or even transparency problems were inherent to the bank’s set-up, and could be avoided by abandoning the so-called two-pillar approach.

The ECB bases its monetary policy on an inflation forecast, which is determined by analyzing money growth figures (the first pillar) and by analyzing real economy data (the second pillar). While money-supply growth figures are used to predict inflation in the longer term – about 18 months – the second pillar, inflation targeting, focuses on a period shorter than this.