​Prices in the euro area have for a prolonged period already been rising more slowly than their long-term average. The early-year rise in inflation expectations was positive, but it is still too early to say that inflation is on a sustainable path towards price stability. Inflation in the euro area is still slow, at 0.1% in August. The greatest single factor behind the subdued rate of inflation has been the price of oil.

The Eurosystem’s expanded asset-purchase programme has progressed as planned and monetary policy has been very accommodative. However, the economic impact of monetary policy is not felt immediately. ‘Full implementation of all current monetary policy measures supports recovery of the euro area economy and a sustained adjustment in the path of inflation consistent with the aim of achieving inflation rates below, but close to, 2% over the medium term,’ stressed Bank of Finland Governor Erkki Liikanen. The key role of inflation expectations in monetary policy underlines the importance of firm policy commitment, particularly in a time of prolonged low inflation. An increase in average inflation to just below 2% requires that from time to time the rate of inflation will exceed 2%.

The accommodative monetary policy is influencing price stability and growth via the relaxation of monetary conditions that has been clearly visible during the past year. ‘The expanded purchase programme and related forward guidance have led to a reduction in market interest rates, which for their part form the basis for interest rates on banks’ loans to firms and households. The reduction in bank lending rates bolsters investment and consumption,’ said Governor Liikanen.

Monetary policy transmission has gradually become more efficient in the euro area, with a strengthened banking system and improved capital adequacy relative to previous years. Further development of the euro area’s capital markets would diversify the funding channels in the real economy, at the same time also supporting long-term growth and diversification of private sector risks.

The slower growth in the global economy involves downside risks for recovery in the euro area. Allied to the decline in the price of oil, this also means inflation could be slower than expected. A slower recovery in the euro area would present new challenges for monetary policy. ‘The ECB Governing Council is monitoring developments very closely and stands ready to take all necessary measures. The monetary policy stimulus can, if necessary, be increased by adjusting the scale, composition or duration of the expanded purchase programme,’ stressed Governor Liikanen.


The package of articles on monetary policy and the international economic forecast will be published in English on 2 October 2015 at www.bofbulletin.fi.