The euro area economy has now benefited from four years of unbroken growth. The monetary policy of the ECB has been highly accommodative, lowering funding costs for households and non-financial corporations alike. In Eurosystem staff projections, growth is expected to remain both broadly based and positive. Nevertheless, the euro area is still recovering from the financial and debt crisis.
Despite ongoing moderate growth, inflation has only started to increase in the past few months on account of rising oil prices. At the same time, the risks of deflation have been substantially receding ever since last summer. There is still unutilized capacity in the economy, and wage growth is moderate. With inflation expectations remaining low, there is little sign of higher inflation in the medium term. 'A very substantial degree of monetary accommodation is still needed in the euro area for underlying inflation pressures to build up and support inflation in the medium term,' said Governor Erkki Liikanen today at the press briefing for the publication of the latest issue of the journal Euro & talous.
Policy rates are at a historical low. The deposit rate has been at -0.40% since March 2016. The key ECB interest rates are expected to remain at present or lower levels for an extended period of time, and well past the horizon of net asset purchases. In December 2016, the ECB Governing Council decided to continue the asset purchase programme (APP) until the end of March 2017. At the same time, the Governing Council decided that monthly purchases would again amount to €60 billion until the end of December 2017. 'Purchases will continue until we see a sustained adjustment in the path of inflation consistent with our inflation aim,' stressed Governor Liikanen. 'Should the economic outlook weaken or the financial market situation no longer contribute to increasing inflation, the duration or volume of purchases can be adjusted.'
Like other euro area countries, Finland is benefiting from the accommodative stance of monetary policy. Stable economic growth in the euro area and globally means that Finnish exports will also pick up and the composition of growth is will broaden. Nevertheless, Finnish growth is set to remain below pre-crisis levels.
Weakened cost-competitiveness was one element behind the contraction in Finnish exports since 2008. 'The Competitiveness Pact is forecast to bring about tangible improvements in cost-competitiveness. Going forward, it is key for unit labour cost growth to remain below those of trading partners in the coming years even after the expiration of the Competitiveness Pact,' said Governor Erkki Liikanen.
For stronger economic growth in the euro area as in Finland, it is key for international trade to remain free and undisturbed. The benefits of globalisation have not been equally distributed: income inequality within advanced economies has increased, and many people have lost their job to structural change. 'We need to pay more attention to reducing the risk of increased marginalisation and lack of opportunities,' said Governor Liikanen. Education plays a key role here. Taxation, income transfers and public services are all relevant to employment. An efficient financial system and developing a competition-friendly regulatory environment will support potential growth and employment.
The package of articles on monetary policy and the international economic forecast will be published in English in the beginning of April at www.bofbulletin.fi.