Economic growth in the euro area has been broad-based and even exceeded forecasts. Investment and consumption have both increased, and the global cyclical upswing has boosted demand for euro area exports. The recovery of the economy has been supported by the ECB’s monetary policy, which has lowered financing costs for companies and households. According to the ECB’s macroeconomic projections published in March, the euro area economy will grow in the next few years at rates above its potential growth rate. While part of the pick-up in growth is sustainable, long-term growth rates are likely to stay below their pre-crisis levels. At the same time, the euro area growth outlook is overshadowed by global economic risks.
Despite the cyclical upswing and decreasing unemployment, the euro area inflation rate remains below the price stability objective. The reduction in unused capacity is gradually pushing up wages and prices, which has boosted confidence in inflation remaining on a path towards the price stability objective.
The Governing Council of the ECB has announced that the extended asset purchase programme will keep running until the end of September 2018, or beyond, if necessary. The Eurosystem will reinvest the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. ‘The Eurosystem’s measures will continue to support banks’ ability to provide funding to the private sector. This will support efforts to attain the price stability objective over the medium term,’ said Governor Erkki Liikanen at today’s press conference for the publication of the latest issue of the journal Euro & talous.
The Governing Council expects key interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. To attain the price stability objective, an accommodative monetary policy remains necessary. ‘The euro area inflation rate is sustainable when the ECB’s price stability objective can be met even without an exceptionally accommodative monetary policy. The conduct of monetary policy needs to rest on patience, persistence and prudence,’ stressed Governor Liikanen.
Strengthening Economic and Monetary Union is a necessary, gradual process. Banking Union already includes single supervisory and crisis resolution mechanisms. Complementing this with a shared deposit guarantee scheme, as well as developing a Capital Markets Union, will ensure the transmission of the single monetary policy to the whole euro area. A strong Economic and Monetary Union provides a shield against the uncertainty that has been heightened by the threat of protectionism and geopolitical risks.
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.