Summary: Even though the general orientation of policy has been faultless, the ECB is still trailing behind state-of-the-art transparency. Previous MECB Reports have already pointed this out and some progress has been achieved but more remains to be done. At a time when euro area inflation expectations are ringing alarm bells, ECB credibility is sliding down. Since late 2005 the ECB has removed its highly accommodative stance, but inflation could have been lower even with the same path of interest rate decisions had not financial markets taken a long time to understand its aim. With the policy rate now close to ‘neutral’, financial markets face greater uncertainty about the next policy move, including its direction. This shows how important it is for the public to understand the reasoning behind the ECB’s policy decisions.
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