Europe Central Bank Statement

Author: | Published: 5 Sep 2017
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Understanding inflation dynamics requires us to divide up the inflation process into two legs: the effect of monetary policy on aggregate demand; and the effect of aggregate demand on inflation. All the evidence suggests that the first leg is working well.

Though the euro area recovery started later than those in other advanced economies, we have now enjoyed 16 straight quarters of growth, with the dispersion of GDP and employment growth rates among countries falling to record low levels. If one looks at the percentage of all sectors in all euro area countries that currently have positive growth, the figure stood at 84% in the first quarter of 2017, well above its historical average of 74%. Around 6.4 million jobs have been created in the euro area since the recovery began.

The role of monetary policy in this growth story is clear. Since mid-2014, our monetary policy stance has been determined by the combination of three instruments: first, low policy interest rates; second, asset purchases in financial markets and targeted long-term refinancing operations for banks; reinforced by, third, forward guidance on both.

This has created strong downward pressure on financing costs, with rates falling steeply across asset classes, maturities and countries, as well as across different categories of borrowers. Converging financing conditions have in turn fed into rising domestic demand.

According to our Bank Lending Survey, our latest easing phase has coincided with a strong rebound in demand for consumer credit to purchase durable goods, while demand for loans for fixed investment has gradually firmed. At the same time, falling borrowing costs have reduced interest payment burdens and facilitated deleveraging, which is one reason why, for virtually the first time since 1999, spending has been rising while indebtedness has been falling. This is a sign that the recovery may be becoming more sustainable.

Just to put our measures into context, since January 2015 – that is, following the announcement of the expanded asset purchase programme (APP) – GDP has grown by 3.6% in the euro area. That is a higher growth rate than in same period following QE1 or QE2 in the United States, and a percentage point lower than the period after QE3. Employment in the euro area has also risen by more than four million since we announced the expanded APP, comparable with both QE2 and QE3 in the US, and considerably higher than QE1.

For the monetary transmission process to work, however, stronger growth and employment ought to translate into higher capacity utilisation, scarcity in production factors and – in time – upward pressure on wages and prices. And this is what we see.

This is an excerpt from the introductory speech given by Mario Draghi, President of the ECB, at the ECB Forum on Central Banking, Sintra, Portugal on June 27 2017. The full original text can be accessed free of charge at www.ecb.europa.eu

 


 

 

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