The Governing Council of the European Central Bank (ECB) met in Frankfurt this March to discuss the latest accounts in monetary policy in Europe. The Council focused at first on the review of current financial and economic developments, and secondly on the proposal of new monetary policy strategies in the next future. We summarize here the main points:
Financial market developments
- Valuations across broad asset classes are consistent with continued optimism about the outlook for global growth.
- Real long-term yields had risen by around 20 basis points in the Euro area since the start of the year. Part of this movement reflected adjustments in term premia, but it also likely reflected investors’ views on growth prospects
- Expected earnings on equity markets are driven by two opposite forces: expected earnings were continuing to push stock valuations high, while the increase in discount rates was pulling stock prices low.
- ASW for Debt Securities: only those of high-yield non-financial corporations (NFCs) had increased somewhat. When looking at sovereign yield spreads vis-à-vis Germany, the resilience had been notable.
- Volatility in equity markets had been exacerbated by technical flows, such as those prompted by investors following risk-parity and short volatility trading strategies, but the VIX index had fallen back from the very high levels reached in early February 2018.
The global environment and economic and monetary developments in the euro area
- Global activity and trade momentum remained sustained: global trade indicators pointed to sustained growth around the turn of the year. Global goods import growth had slowed in the fourth quarter but trade indicators were relatively afloat, with the global PMI standing above its long-term average.
- Current Euro area economy is in an ongoing economic expansion. Favourable financing conditions and steady income and profit growth, together with a robust labour market, continued to be the key factors supporting aggregate demand. According to the latest data, Eurostat’s flash estimate had put euro area real GDP growth at 0.6%, quarter on quarter, in the fourth quarter. The expansion had been broad-based across sectors.
- Outlook on Euro area economy reflects such positive developments, projecting real GDP growth at 2.5% in 2017, 2.4% in 2018 ,1.9% in 2019 and 1.7% in 2020. The favourable growth outlook was supported by a number of factors, including a continued global expansion, the ECB’s very accommodative monetary policy stance, improving labour markets and diminishing deleveraging pressures for NFCs and households.
- Inflation as measured by the annual HCIP stood at 1.2% in February, down of 0.1% with respect to previous month. Measures of underlying inflation remained low by historical standards, although they had shown a marked improvement since the trough in 2016. Recent developments had confirmed a gradual upward trend. In the March ECB staff projections, headline inflation was expected to reach 1.7% in 2020, driven by underlying inflation, after 1.4% in both 2018 and 2019.
- Money and Credit growth in the broad monetary aggregate M3 had remained robust and within the narrow range of 4.5-5.5% observed since the launch of the expanded asset purchase programme (APP) in early 2015. In January 2018 the annual growth rate of loans to NFCs had continued its upward trend, while the annual growth rate of loans to households had remained unchanged.
- Banks’ capital ratios had continued to strengthen in the third quarter of 2017, reflecting mainly an increased positive contribution from recapitalisation. Balance sheet de-risking had also continued to support capital ratios, as asset quality had been improving in line with macroeconomic fundamentals and balance sheet restructuring.
Monetary policy decisions and communication
Taking into account the foregoing discussion among the members, on a proposal from the President, the Governing Council decided
- Interest rates on the main refinancing operations, marginal lending facility and deposit facility would remain unchanged at 0.00%, 0.25% and -0.40% respectively.
- Net asset purchases, at the current monthly pace of €30 billion, were intended to run until the end of September 2018, or beyond, until it saw a sustained adjustment in the path of inflation consistent with its inflation aim.
- Principal payments under the APP, that is, from maturing securities purchased under the APP will be reinvested for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary. This would contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.