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09 October 2015

ECB: Euro area economic outlook, the ECB’s monetary policy and current policy challenges

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ECB's Draghi spoke about the need to complete banking union and to develop a CMU in order to "make our monetary union in Europe stable and prosperous". He also said that the APP programme could be adjusted if necessary before achieving the 2% inflation rate or its September 2016 deadline.

Statement by Mario Draghi, President of the ECB, at the thirty-second meeting of the International Monetary and Financial Committee, Lima

[...] Significant progress towards sound public finances, the implementation of structural reforms and further steps towards completing the banking union should buttress the so far moderate recovery, while a new convergence process is needed to foster the euro area’s crisis resilience.

The cyclical recovery in the euro area, which started more than two years ago, is continuing Real GDP rose by 0.4%, quarter on quarter, in the second quarter of this year, following growth of 0.5% in the first quarter. The latest data and survey evidence confirm that this growth trend will continue in the second half of this year. Looking ahead, the economic recovery is expected to continue. [...] However, economic growth in the euro area is likely to continue to be dampened by the necessary balance-sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms. At the same time, labour markets remain weak but are gradually improving. Employment increased further in the second quarter of 2015, while the unemployment rate has continued to decline. Survey data point to further improvements in labour market conditions in the period ahead. The risks to the growth outlook remain on the downside, reflecting in particular the heightened uncertainties related to the external environment.

Against a background of further declines in commodity prices, notably oil, recent HICP inflation numbers have drifted back to levels around zero, following the rebound from negative rates seen earlier in the year. Looking ahead, headline inflation is expected to remain very low in the near term, until upward base effects relating to energy prices push it up towards the end of the year. Inflation rates are foreseen to rise further during 2016 and 2017, supported by the expected economic recovery, the pass-through of past declines in the exchange rate, and, assuming current prices in futures markets materialise, somewhat higher oil prices in the years ahead. [...]

Our monetary policy continues to aim to safeguard price stability. [...] In January 2015, an expanded asset purchase programme (APP) was launched. The APP continues to proceed smoothly and – together with other monetary policy measures – has a favourable impact on the cost and availability of credit for firms and households, contributing to the euro area recovery and a gradual rise in inflation. We intend to purchase private and public securities until the end of September 2016, or beyond if necessary, and, in any case, until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term. [we are] ready to use all the instruments available within our mandate to act, if warranted, in particular by adjusting the size, composition and duration of the asset purchase programme.

Since the peak of the crisis, the euro area has made significant progress towards sound public finances and implementing structural reforms. [...] Such reforms will increase productive investment, boost job creation and raise productivity, while increasing the adjustment capacity and resilience of the euro area economies to global shocks. Fiscal policies should support the modest economic recovery and ensure debt sustainability, while remaining in full compliance with the EU’s fiscal rules. With bond yields subject to volatility, high-debt countries in particular need to pay attention to risks related to a reversal of the current low interest rate environment.

We have achieved significant progress over the past year, with banking union becoming a reality and with the Single Supervisory Mechanism and the Single Resolution Mechanism starting their operations. However, developments in Greece in the first half of this year served as a reminder that the euro area architecture remains unfinished. As spelled out in the Five Presidents’ Report, a more complete union is necessary to make our monetary union in Europe stable and prosperous. The economic and monetary union will notably need to strengthen its tools for managing and preventing the build-up of fiscal, financial and other macroeconomic risks.

It is also necessary for the euro area to move towards completing banking union in order to create a truly single banking system and achieve its objectives of breaking the bank-sovereign nexus, making the financial system more resilient, and protecting the interests of taxpayers. In parallel, the authorities will need to decisively deal with remaining crisis legacies to create a better foundation for bank lending to the real economy.

To further widen the scope for cross-border private risk-sharing in Europe, the EU will have to make progress in developing a capital markets union (CMU). CMU will also play a key role in supporting European growth by diversifying sources of funding and increasing companies’ access to financing. A long-term vision accompanied by an ambitious agenda for further action will be necessary in order to achieve the ultimate aims of CMU. [...]

Full speech

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