​Euro area inflation and inflation expectations both fell at end of 2014. Following a prolonged period of extremely sluggish price developments, the ECB Governing Council decided in January 2015 to extend its securities purchases to also cover public sector securities. ‘The ECB is committed to delivering on its primary mandate, price stability. To respect this commitment, the large-scale asset purchases will be carried out at least until end-September 2016 and in any case until the Governing Council judges the pace of inflation is returning sustainably to a level in line with the price stability objective,’ stressed Bank of Finland Governor Erkki Liikanen today at the press briefing for release of the Bank’s journal Euro & talous.

Market interest rates in the euro area have fallen and the downward trend in inflation expectations has eased. The financial position of non-financial corporations and households has, as a whole, become easier. Moreover, monetary growth and developments in lending have strengthened. ‘Monetary policy decisions and the measures taken have already had a clear, positive impact on the economic outlook,’ said Governor Liikanen.

The economic recovery is forecast to strengthen and inflation gradually gather pace in the euro area. The high level of debt will, however, maintain the pressure for debt reduction and weaken demand.

Accommodative monetary policy is essential to safeguard price stability. Negative side-effects cannot, however, be ruled out. The accommodative monetary policy could cause imbalances on some markets and in some areas. ‘It is very important to ensure the existence of effective macroprudential tools in each Member State and to maintain readiness to deploy them if required to ensure a balanced development of the economy,’ Governor Liikanen continued.

Other areas of economic policy will require determined action to allow the accommodative monetary policy stance to exert the maximum possible benefit on the economy. ‘Euro area recovery requires structural reforms, especially in product and labour markets,’ stressed Governor Liikanen. ‘The need for structural reforms to boost potential GDP growth is particularly clear in countries where the working-age population is no longer growing or is actually decreasing.

Consistent adherence to the Stability and Growth Pact will sustain the credibility of the public finances. There is limited room for a fiscal stimulus to bolster demand when the government budget has continued in deficit for a prolonged period and the long-term growth outlook is weak.