At its meeting last week, the Governing Council of the ECB concluded that economic outlook in the euro area had weakened rapidly. According to the ECB’s latest staff projections, real GDP growth this year is expected to be slower than previously forecast in December 2018, due to heightened uncertainty over global economic developments and a slowing of euro area export growth. Inflationary pressures in the euro area continue to be muted. According to the ECB’s projections, inflation looks set to remain below the inflation target, as determined by the price stability objective.

Based on its assessment of the incoming data, the Governing Council decided to strengthen its monetary accommodation to ensure that inflation remains on a path consistent with the objective.

First, the Governing Council announced that it now expects the ECB’s key interest rates to remain at their present levels at least through the end of 2019. It had previously announced that interest rates would remain unchanged at least through the summer of 2019.

Secondly, the Governing Council decided to launch a third series of targeted longer-term refinancing operations. These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy.

Thirdly, the Governing Council confirmed its decision to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

‘The Governing Council's new decisions reinforce the accommodative effects of monetary policy. These decisions will help preserve favourable liquidity conditions, support lending to businesses and households, and bolster economic growth and employment’, stated Bank of Finland Governor Olli Rehn at the press briefing for the publication of the new issue of the journal Euro & talous.

The operating environment for monetary policy has changed both during and after the crisis. The natural rate of interest has fallen, and inflation expectations have remained at historically low levels. Inflation expectations have persisted below the ECB’s price stability target for so long that expectations of low inflation have become self-fulfilling. ‘I have proposed that the Governing Council would review the ECB’s monetary policy strategy, in light of the latest findings in economic research and the changed environment for monetary policy. Such a review will ensure that the ECB's monetary policy remains credible and effective, even in the changed economic environment’, emphasised Governor Rehn.

A package of articles by Bank of Finland experts focusing on the outlook and monetary policy of the euro area will be published in English at the end of March at www.bofbulletin.fi.

For further information, please contact Hanna Freystätter, Head of Division, tel.  +358 9 183 2490.

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