The euro area is experiencing broadly based economic growth. Confidence in the economy has increased and investment levels are on the rise. The economic expansion is projected to be solid in the coming years, across a range of economic sectors and countries. Yet, this upturn in growth has not led to a satisfactory rise in the rate of inflation. At the beginning of 2017, rising energy costs and food prices were the primary contributors to inflationary pressure. Since then, however, their impact has lessened.
'The amount of underutilized capacity within the economy is expected to gradually be taken up, and the global economy's generally favourable outlook will support growth in the euro area. Together these factors support expectations that the inflation rate will slowly return to the policy objective, even if inflation has so far remained relatively subdued. A very substantial degree of monetary accommodation is still needed in the euro area for underlying inflationary pressures to gradually build up,' said Governor Erkki Liikanen today at the press briefing for the publication of the latest issue of the Bank of Finland's journal Euro & talous.
Economic activity has received significant support from ECB monetary policy in recent years. Policy rates are at an historical low and are expected to remain at their current levels for a prolonged period of time, even past the duration of the expanded asset purchase programme (EAPP). Monetary policy will maintain accommodative financing conditions until the sustainability of the price stability objective is secured. The EAPP will be extended to the end of December 2017, at the very least, and beyond if required. 'The ECB Governing Council will this autumn decide on the calibration of its policy instruments beyond the end of the year, taking into account the expected path of inflation and the financial conditions needed for a sustained return of inflation rates towards levels that are below, but close to, 2%,' added Governor Liikanen. 'The ECB's policy target is symmetrical. It is of equal importance to act effectively on inflation levels that are above or below the price stability objective.'
The euro area's accommodative monetary policy has also bolstered the recovery of the Finnish economy. Lending rates remain low, and the euro area has seen continued economic growth, which is important for Finland's export sector. Furthermore, Finnish exports are receiving support both from the outlook for the global economy and from the Competitiveness Pact, which came into force at the turn of the year. 'Finland's economic recovery is now more broadly based and robust than before, owing to the upturn in exports and corporate investment,' said Governor Liikanen.
It is important that the measures designed to strengthen Finland's economy continue to be implemented. 'The decline in cost-competitiveness has been turned around and the situation improved. It is essential to sustain this progress and recover the losses of the past decade,' pointed out Governor Liikanen. Most urgent are measures to foster growth in employment and productivity as well as strengthen the public finances and improve their long-term outlook.
The package of articles on monetary policy and the international economic forecast will be published in English in October at www.bofbulletin.fi.