The slowdown in the growth rates of global trade and the emerging economies, as well as the increase in financial market uncertainty early in the year have weakened the outlook for the euro area economy. Growth in global trade is dampened particularly by weaker growth in the emerging economies, including China. In the euro area, growth continues to rest on domestic demand.
In 2015, the average annual inflation rate for the euro area was 0%, the lowest outcome since the start of Monetary Union. The slow pace of inflation has mainly reflected the low price of oil. In February 2016, inflation was -0.2%. The slowdown in inflation has been broadly based.
In view of the weakened economic and inflation outlook, the Governing Council of the ECB decided in March 2016 on several measures in pursuit of its price stability objective. These measures included lowering all key interest rates, extending the asset purchase programme to cover debt securities issued by the corporate sector, and expanding the volume of monthly asset purchases. In addition, with the aim of further incentivising bank lending to the real economy, banks can obtain very long-term loans in targeted longer-term refinancing operations.
“The monetary policy measures and forward guidance together constitute a comprehensive response. The new measures will accelerate the return of inflation to levels below but close to 2%, and support the recovery of the euro area economy,” said Erkki Liikanen, Governor of the Bank of Finland, at today’s press conference. The package is aimed at further easing financing conditions in the euro area and stimulating new credit provision. “Taking into account the current inflation outlook, our policy rates are expected to remain at present or lower levels for an extended period of time, and well past the horizon of the asset purchases. If the outlook or financing conditions deteriorate, the ECB still has capacity to boost inflation and growth,” Governor Liikanen emphasized.
“The new longer-term refinancing operations offered to banks will improve their capacity to lend to the real economy. In the euro area, monetary policy feeds through to the real economy mainly via the banks. It is crucial for economic recovery that the banking sector is in good shape,” Governor Liikanen stressed.
The accommodative monetary policy is gradually increasing demand in euro area countries, which will also help Finland. The low interest rate level is reflected in low rates on corporate loans and housing loans. As these loans mainly bear a variable rate and the banking system is in good shape, the transmission of monetary policy is particularly effective in Finland. “Turning the Finnish economy onto solid growth requires improved cost competitiveness and structural reforms. When this creates a need to expand production, accommodative monetary policy improves financial conditions and supports firms’ decisions to invest and create jobs,” said Governor Liikanen.
The package of articles on monetary policy and the international economic forecast will be published in English in early April at www.bofbulletin.fi.