The European Central Bank (ECB), which has kept its benchmark refinancing rate at zero percent and the deposit rate at minus 0.40 percent since March 2016, raised its forecast for economic growth but lowered its inflation forecast due to a higher exchange rate of the euro.
But ECB President Mario Draghi also cautioned that the euro area is in need of "a continued very substantial degree of monetary accommodation to secure a sustained return of inflation" that is close to the target of below, but close to 2.0 percent.
Draghi also confirmed the ECB's asset purchases, aimed at keeping down long-term interest rates, would continue at their current monthly pace of 60 billion euros until December, and reiterated the guidance - first issued in 2013 - that he expects key ECB rates to remain at their present level for an extended period of time, and well past the horizon of asset purchases.
But while Draghi voiced confidence the ongoing economic expansion will gradually pull up inflation towards the target of just below 2.0 percent, the strength of the euro may now delay this. A strong exchange rate tends to hold down import prices and thus inflation.
"The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability," Draghi said.
The euro has been strengthening all year after hitting a record low of US$1.04 in December 2016 as investors grew convinced the euro area's economy finally was recovering.
In June the euro got another boost when Draghi in Portugal said "the threat of deflation is gone and reflationary forces are at play," fueling speculation of "quantitative tightening" with the ECB at first scaling back its monthly asset purchases before joining the U.S. and Canada in raising rates.
Today the euro then jumped to over $1.20, a level not seen since January 2015, as Draghi said the ECB governing council would decide on "the calibration of our policy instruments beyond the end of the year," raising the prospect that its massive stimulus program will be wound up.
The next monetary policy meeting of the governing council is Oct. 26.
Draghi said the ECB's new economic projections, which will be released in two weeks, showed that economic growth remains broad-based, with private consumption supported by higher employment and household wealth while investment is benefiting from easy financing and improved corporate profitability.
Annual growth in the euro area this year is now forecast to rise to 2.2 percent this year, up from the June forecast of 1.9 percent.
In the second quarter of this year euro area Gross Domestic Product expanded by 2.3 percent year-on-year, up from 2.0 percent.
But next year and in 2019 the economy is seen slowing to growth of 1.8 percent and 1.7 percent growth, respectively, unchanged from June.
"Risks surrounding the euro area growth outlook remain broadly balanced," Draghi said, with the current positive cyclical momentum raising the chances of higher growth while foreign exchange markets pose downside risks.
Headline inflation in the euro area has come down from levels around the ECB's target earlier this year and Draghi expects a further temporary decline towards the end of this year due to the base effect of energy prices.
And while underlying inflation has ticked up, Draghi said it has yet to show convincing signs of a sustained upward trend and cost pressures from labour markets remain subdued.
ECB staff forecast headline inflation of 1.5 percent this year, unchanged from the June forecast, then 1.2 percent in 2018, down from 1.3 percent. In 2015 inflation is seen at 1.5 percent.
A flash estimate shows euro area inflation of 1.5 percent in August, up from 1.3 percent in July.
The European Central Bank issued the following statement:
"At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council 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.
Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases are made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today."
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. Regarding non-standard monetary policy measures, we confirm that our net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases are made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme.
The incoming information, including our new staff projections, confirms a broadly unchanged medium-term outlook for euro area economic growth and inflation. The economic expansion, which accelerated more than expected in the first half of 2017, continues to be solid and broad-based across countries and sectors. At the same time, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.
While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim, it has yet to translate sufficiently into stronger inflation dynamics. Measures of underlying inflation have ticked up slightly in recent months but, overall, remain at subdued levels. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration. This autumn we will decide on the calibration of our policy instruments beyond the end of the year, taking into account the expected path of inflation and the financial conditions needed for a sustained return of inflation rates towards levels that are below, but close to, 2%.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.6%, quarter on quarter, in the second quarter of 2017, after 0.5% in the first quarter. Survey data point to continued broad-based growth in the period ahead. Our monetary policy measures are supporting domestic demand and have facilitated the deleveraging process. Private consumption is underpinned by employment gains, which are also benefiting from past labour market reforms, and by increasing household wealth. The recovery in investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Moreover, the broad-based global recovery will support euro area exports.
This assessment is broadly reflected in the September 2017 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 2.2% in 2017, by 1.8% in 2018 and by 1.7% in 2019. Compared with the June 2017 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised up for 2017, reflecting the recent stronger growth momentum, and is broadly unchanged thereafter.
Risks surrounding the euro area growth outlook remain broadly balanced. On the one hand, the current positive cyclical momentum increases the chances of a stronger than expected economic upswing. On the other hand, downside risks continue to exist, primarily relating to global factors and developments in foreign exchange markets.
Euro area annual HICP inflation was 1.5% in August. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to temporarily decline towards the turn of the year, mainly reflecting base effects in energy prices. At the same time, measures of underlying inflation have ticked up moderately in recent months, but have yet to show convincing signs of a sustained upward trend. Domestic cost pressures, notably from labour markets, are still subdued. Underlying inflation in the euro area is expected to rise gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion, the corresponding gradual absorption of economic slack and rising wages.
This assessment is also broadly reflected in the September 2017 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.5% in 2017, 1.2% in 2018 and 1.5% in 2019. Compared with the June 2017 Eurosystem staff macroeconomic projections, the outlook for headline HICP inflation has been revised down slightly, mainly reflecting the recent appreciation of the euro exchange rate.
Turning to the monetary analysis, broad money (M3), despite some monthly volatility, continues to expand at a robust pace, with an annual rate of growth of 4.5% in July 2017, after 5.0% in June. As in previous months, annual growth in M3 was mainly supported by its most liquid components, with the narrow monetary aggregate M1 expanding at an annual rate of 9.1% in July 2017, down from 9.7% in June.
The recovery in the growth of loans to the private sector observed since the beginning of 2014 is proceeding. The annual growth rate of loans to non-financial corporations increased to 2.4% in July 2017, up from 2.0% in June, while the annual growth rate of loans to households remained stable at 2.6%. 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 financing ‒ notably for small and medium-sized enterprises ‒ and credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for a continued very substantial degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2%.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively to strengthening the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area growth potential and productivity. Regarding fiscal policies, all countries would benefit from intensifying efforts towards achieving a more growth-friendly composition of public finances. A full, transparent and consistent implementation of the Stability and Growth Pact and of the macroeconomic imbalances procedure over time and across countries remains essential to bolster the resilience of the euro area economy. Strengthening Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing discussions on further enhancing the institutional architecture of our Economic and Monetary Union.
We are now at your disposal for questions."
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