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
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