The Governing Council of the European Central Bank has defined this objective as meaning, in practice, that the year-on-year increase in consumer prices should be below, but close to, 2% over the medium term. Monetary policy also supports the other economic policy objectives of the EU, such as sustainable growth and employment, insofar as the objective of price stability is not jeopardised. Monetary policy remained highly accommodative throughout 2018, although the first steps towards a gradual normalisation of monetary policy were taken in June.

As a member of the Governing Council of the ECB, the Governor of the Bank of Finland is directly involved in decision-making on euro area monetary policy. Experts from the Bank of Finland participate in the preparation of monetary policy decisions and other background work, all of which is based on economic and monetary policy analysis conducted at the Bank of Finland as well as on the Bank’s active participation in the Eurosystem’s Monetary Policy Committee and Market Operations Committee.

In 2018, the ECB's monetary policy remained highly accommodative. The Governing Council held the key ECB interest rates unchanged throughout the year. The interest rate on the ECB's main refinancing operations and the rates on the marginal lending and deposit facilities remained at 0.00%, 0.25% and −0.4% respectively. These rates have remained in place since March 2016. The Governing Council anticipated that the key ECB interest rates will remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

Net purchases under the expanded asset purchase programme (APP), which itself is part of the ECB's non-standard policy measures, were ended by the Governing Council in December 2018, having first been reduced to a monthly pace of EUR 30 billion in January and again to EUR 15 billion in October. However, the principal payments from maturing securities purchased under the APP will continue to be reinvested for an extended period of time past the date when the Governing Council 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. As the period of net purchases ended, the Eurosystem’s consolidated balance sheet stood at slightly below EUR 4,700 billion.

Net purchases halved in January

At the beginning of 2018, the ECB Governing Council reduced the monthly pace of its net purchases under the APP from EUR 60 billion to EUR 30 billion, in accordance with its monetary policy decision taken in October 2017.

At its monetary policy meeting in January, the Governing Council held its key policy rates unchanged and reaffirmed its forward guidance, stating that it expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

In addition, the Governing Council confirmed its earlier monetary policy decision to extend the period of net asset purchases at least until the end of September 2018. The Governing Council reiterated that the principal payments from maturing assets will continue to be reinvested for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary to ensure the continued sustained convergence of inflation towards the inflation aim.

In January, the Governing Council noted that the incoming data indicated a robust pace of economic expansion for the euro area. The Governing Council anticipated that the strong cyclical momentum, the ongoing reduction of economic slack, and increasing capacity utilisation would further strengthen confidence in inflation converging towards the objective of below, but close to, 2%. At the same time, the Governing Council noted that domestic price pressures in the euro area remained muted and stressed the continuing need for an ample degree of monetary accommodation.

Euro area growth momentum moderated in the spring, downside risks accumulated

At its monetary policy meeting in March 2018, the ECB Governing Council noted that incoming information had confirmed the strong and broad-based growth momentum in the euro area economy. In the near term, the economy was projected to expand at a somewhat faster pace than previously expected. This assessment was also broadly reflected in the ECB staff macroeconomic projections for the euro area.

In its March projections, the ECB staff projected euro area real GDP growth at 2.4% in 2018, 1.9% in 2019 and 1.7% in 2020. The inflation projection remained broadly unchanged, with HICP inflation projected to accelerate to 1.7% in 2020.

The Bank of Finland too, in its analysis of the global economy published at the end of March, assessed that the euro area’s economic expansion would continue, driven by euro area domestic demand as well as cyclical tailwinds in the global economy. The Bank noted that the acceleration in HICP inflation was largely due to a higher oil price and that domestic price pressures remained rather moderate.

At its monetary policy meeting at the end of April, the Governing Council noted that the data available after its meeting in March remained consistent with a solid and broad-based expansion of the euro area economy, albeit showing signs of moderation. The Governing Council deemed that the pace of growth had converged towards a more moderate trend, reflecting a pull-back from the brief surge observed at the end of 2017. The Governing Council noted that the dip in momentum might also be explained by temporary factors.

The Governing Council assessed that the risks surrounding the euro area growth outlook remained broadly balanced. However, it stressed that risks related to global factors, including the threat of increased protectionism, had become more prominent. The Governing Council noted that the outlook for inflation had remained unchanged.

Interest rates on loans remained low in the early part of the year

Euro area financing conditions remained favourable in the early part of 2018. The pass-through of monetary policy measures continued to significantly support borrowing conditions for households and firms while bolstering credit flows across the euro area.

The private-sector loan stock continued to recover, and interest rates on loans remained relatively stable and at very low levels. Businesses reported better access to finance in a number of surveys, and credit growth was bolstered by stronger credit demand across all loan categories and increasingly relaxed borrowing conditions for households and firms.

Gradual normalisation of monetary policy begun in June

In June, the Governing Council embarked on its gradual normalisation of the ECB’s monetary policy. The Governing Council announced that it would continue its net asset purchases under the APP at a monthly pace of EUR 30 billion until the end of September 2018. Following this, and subject to incoming data proving consistent with the Governing Council's medium-term inflation expectations, the monthly pace of net purchases would be reduced to EUR 15 billion until the end of December 2018, and then concluded. The Governing Council stated that it intends to maintain its policy of reinvesting the principal payments from maturing securities purchased under the APP for as long as necessary to realise its price stability mandate.

The Governing Council based its decision on the substantial progress made in the sustained converge of inflation towards levels just below 2% over the medium term. In its assessment, the Governing Council stated there were sufficient grounds to believe that the sustained convergence of inflation towards the inflation aim will continue, and will be maintained even after a gradual winding-down of our net asset purchases. However, the Governing Council emphasised that it stands ready to adjust all of its instruments as appropriate.

In June, the Governing Council decided to hold the key ECB interest rates unchanged but reaffirmed its forward guidance, stating that it expects policy rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation towards levels that are below, but close to, 2% over the medium term.

Growth continued — inflation spurred by oil prices

At its meeting in June, the Governing Council noted in its economic analysis that economic indicators and survey results were weaker but still remained consistent with ongoing solid and broad-based economic growth. Risks surrounding the euro area growth outlook remained broadly balanced, but the Governing Council warned that the risk of persistent heightened financial market volatility warranted monitoring.

The Governing Council assessed that the rapid acceleration of HICP inflation in May was due to higher contributions from energy, food and services price inflation. While core inflation still remained muted, the Governing Council emphasised that domestic price pressures in the euro area were gathering strength and uncertainty around the inflation outlook was receding.

In the June 2018 Eurosystem staff macroeconomic projections, real GDP growth in the euro area was foreseen at 2.1% in 2018, 1.9% in 2019 and 1.7% in 2020. The downward revision to the growth outlook for 2018 was due to the early part of the year coming in below expectations.

Annual HICP inflation was projected at 1.7% for the entire forecast period. Compared with the ECB staff macroeconomic projections published in March, the outlook for HICP inflation was revised notably upwards for 2018 and 2019, mainly reflecting higher oil prices.

At its monetary policy meeting at the end of July, the Governing Council noted that the incoming data indicated that the euro area economy remained on a solid and broad-based growth path, although uncertainties relating especially to the global trade environment remained prominent.

The Governing Council emphasised that economic indicators and survey results had stabilised and continued to point to ongoing solid and broad-based economic growth, in line with the June 2018 Eurosystem staff macroeconomic projections for the euro area.

GDP growth forecasts revised slightly downwards in autumn

At its monetary policy meeting in September, the Governing Council noted that the incoming data had overall confirmed its assessment in June of ongoing broad-based growth of the euro area economy and gradually rising inflation. However, it observed that risks relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility had gained more prominence.

This assessment was also broadly reflected in the September 2018 ECB staff macroeconomic projections for the euro area. In the projections, real GDP growth in the euro area was forecast at 2.0% in 2018, 1.8% in 2019 and 1.7% in 2020.

Compared with the Eurosystem staff macroeconomic projections published in June, the outlook for real GDP growth was revised down for 2018 and 2019, mainly due to a somewhat weaker contribution from external demand. The outlook for inflation was seen as unchanged.

At its monetary policy meeting at the end of October, the Governing Council deemed that the incoming information, while somewhat weaker than expected, remained overall consistent with its baseline scenario of an ongoing broad-based economic expansion, supported by domestic demand and continued improvements on the labour market.

However, the Governing Council noted that sector-specific developments, particularly in car manufacturing, were having an impact on the near-term growth profile. In addition, the Governing Council found the outlook for euro area exports to be more subdued than previously expected.

In its analysis of the global economy published in October, the Bank of Finland anticipated the euro area’s positive growth momentum would continue. Growth was being backed not only by monetary accommodation but also by a relatively relaxed fiscal policy in relation to the economic cycle, although the pace of growth had slowed on the previous year.

The Bank of Finland noted a moderate rise in inflationary pressures, with accelerating wage growth being one contributing factor. However, this would be reflected in euro area inflation only slowly, as inflation expectations still remained rather muted. The Bank also considered that the uncertainty over the direction of economic policy in Italy was casting a shadow over the entire euro area outlook, and that the escalation in trade tensions over the summer had increased the downside risks surrounding the global economy.

Net purchases concluded in December 2018 — monetary policy remains accommodative

At its monetary policy meeting in December, the Governing Council confirmed its decision to end net purchases under the APP at the end of December 2018.

At the same time, the Governing Council clarified that it intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP 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.

In December, the Governing Council emphasised that the underlying strength of domestic demand continued to underpin the euro area expansion and gradually rising inflation pressures. This supported the Governing Council's confidence that the sustained convergence of inflation towards the inflation aim would proceed and be maintained, even beyond the horizon of the net asset purchases.

The Governing Council noted that the latest data and survey results on the euro area economy were weaker than expected, reflecting a diminishing contribution from external demand and some country and sector-specific factors. Although the Governing Council expected some of these factors to unwind, it anticipated potentially moderating growth momentum going forward.

In the December 2018 Eurosystem staff macroeconomic projections for the euro area, the outlook for real GDP growth had been revised slightly down for 2018 and 2019, compared with the ECB staff projections published in September. Accordingly, the Eurosystem staff projected euro area GDP growth at 1.9% in 2018, 1.7% in 2019, 1.7% in 2020 and 1.5% in 2021.

Meanwhile, annual euro area HICP inflation was seen at 1.8% in 2018, 1.6% in 2019, 1.7% in 2020 and 1.8% in 2021.

The inflation outlook remained moderate at the end of the year, as core inflation persisted at levels near 1%. The Governing Council emphasised that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation towards levels consistent with the inflation aim.

The accommodative stance of monetary policy is being supported by the Eurosystem’s sizeable stock of acquired assets, maintained through the reinvestment of maturing securities. Monetary accommodation is also being backed by exceptionally low monetary policy interest rates and by the Governing Council’s forward guidance, according to which it expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary.

Accommodative monetary policy supports euro area growth

Overall, the ECB's accommodative monetary policy has contributed to the favourable growth momentum in the euro area economy and has been effectively transmitted into bank lending. The average interest rates on private-sector loans remained low, and year-on-year lending growth accelerated across loan types. The expansion of economic activity in the euro area continued. However, the pace of growth did moderate over the year when compared with the brisk growth observed in 2017.

The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to finance – in particular for small and medium-sized enterprises – and credit flows across the euro area.

In spite of the improved conditions on the labour market and gradually accelerating wage inflation, core inflationary pressures and inflation expectations remained relatively moderate. In 2018, average HICP inflation in the euro area was 1.7%. However, the rise in inflation was largely due to higher energy prices. When purged of the more volatile food and energy components, core inflation reached just 1.0% on average. Market-based inflation expectations, derived from five-year inflation swaps five years ahead, averaged 1.6% in December 2018. Meanwhile, inflation expectations five years ahead based on the ECB Survey of Professional Forecasters stood at 1.9%. Against this backdrop, an ample degree of monetary accommodation is still needed in the pursuit of price stability.

The ECB Governing Council has also consistently stressed that in order to reap the full benefits from monetary policy measures, other policy areas must contribute more decisively to raising longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, there is still need for rebuilding fiscal buffers. In addition to these considerations, improving the functioning of Economic and Monetary Union remains an urgent priority.



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