How can we avoid a negative equilibrium of low growth and low inflation?
At its meeting on 12 September 2019, the Governing Council of the ECB concluded that economic growth in the euro area will continue to be subdued. The expansion of global trade has stalled, while the headwinds in manufacturing, in particular, have proven more long-lasting than previously forecast. Inflation has persistently fallen short of the ECB's price stability objective. The Governing Council noted that the growth outlook remains beset by prominent downside risks and that inflationary pressures are projected to stay muted.
In response, the Governing Council took the decision at its September meeting to substantially increase its monetary accommodation, lowering the interest rate on the ECB deposit facility by 10 basis points, to -0.50%, and strengthening its forward guidance to indicate that it now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge towards the price stability objective, and such convergence has been consistently reflected in underlying inflation dynamics. In addition, the Governing Council announced that net purchases under the asset purchase programme will be relaunched at a monthly pace of EUR 20 billion as from 1 November. It also took the decision to ease the modalities of the longer-term refinancing operations as well as introduce a two-tier system for reserve remuneration on banks’ holdings of excess liquidity.
With this package of monetary policy stimulus measures, financial conditions in the euro area will remain very favourable for an extended period, contributing to the euro area's growth outlook also in the long term. ‘We should take care to avoid the sort of harmful equilibrium that arises from prolonged low inflation and zero interest rates, as this would significantly constrain the capacity for monetary policy to balance the economic cycle. This would bring about a lengthy shortfall in economic growth with respect to its potential and hinder efforts to boost 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 discussions concerning a review of the ECB's monetary policy strategy have progressed over the year, and a broad consensus has emerged over its necessity. ‘Successful implementation of the strategy review will deepen the research-based knowledge underpinning the monetary policy strategy and thus help strengthen the common understanding on policy within the Governing Council. The review process should thus contribute to better monetary policy decision-making and support consistent communication,’ emphasised Governor Rehn.
For queries pertaining to monetary policy, contact Governor Olli Rehn, tel. +358 9 183 2001. For further information on the journal Euro & talous, please contact Hanna Freystätter, Head of Division, tel. +358 9 183 2490.