Tuesday, September 17, 2019
/ 05:56AM / By Philip R. Lane, ECB / Header Image Credit: thefinancialanalyst.net
Being a Keynote Speech by Philip R. Lane, Member of The
Executive Board Of The ECB, At Bloomberg, London, 16 September 2019.
will divide this speech into two parts. First, I wish to review the current
economic and financial environment. Second, I will discuss the monetary policy
decisions taken by the Governing Council in last week's meeting.1
The Euro Area Economy
Incoming information is signalling a more extended slowdown in
euro area growth dynamics than previously expected. As I will discuss, this
slowdown is mainly due to external developments. While domestic demand is
resilient, persistent uncertainties related to protectionist policies and
geopolitical factors are taking a toll on economic sentiment and are clearly
weighing on the euro area manufacturing sector.
On the international front, the latest survey data indicate that
global activity remains subdued. This is the case in both emerging market and
advanced economies, which suggests that a common factor is at play (Chart 1).
The manufacturing sector has been affected most strongly, in particular for
capital and intermediate goods, as well as for durable consumption goods. Since
these goods are highly tradable, their production is sensitive to developments
in international trade, which continues to be weak (Chart 2). Global trade and,
consequently, euro area foreign demand have slowed substantially in recent quarters.
Chart 1: Composite output PMI (diffusion
index; seasonally adjusted; monthly data)
Markit and ECB staff calculations. Notes: The long-run averages are 53.0 for
the euro area, 54.2 for advanced economies excluding the euro area and 53.1 for
emerging market economies. Long-run average refers to the period from 1999
onwards for euro area and advanced economies and 2005 onwards for emerging
market economies. Latest observation: July 2019.
Chart 2: Global merchandise import growth (three-month-on-three-month
CPB and ECB staff calculations. Latest observation: June 2019.
obvious source of weak trade dynamics is the uncertainty surrounding the
international trading system, due to the rise of protectionism and geopolitical
factors. Although the direct effects of individual tariff measures on economic
activity have been contained, prolonged uncertainty and the prospect of an
escalation of trade disputes are indirectly affecting the world economy by
weighing on economic sentiment and global investment. Not only are
protectionist measures a near-term headwind for the world economy, they can
also give rise to allocative distortions that affect the level of potential
output and the potential rate of productivity growth.
While these trade tensions are prominent, we should not ignore the
fact that other factors are also affecting the manufacturing sector. Some
emerging economies (including China) are rebalancing away from
export-orientated manufacturing towards domestically-orientated services
sectors. In addition, following an exceptionally strong performance in 2017,
the global technology sector has started to cool (Chart 3).2 Several key Asian economies specialise in tech production,
with Asian tech exports accounting for 10 percent of global trade. These
economies are closely linked to one another through integrated supply chains,
such that the slowdown in tech production has affected economic activity in a
number of countries.
Chart 3: The global tech cycle (left-hand
scale: diffusion index; right-hand scale: annual percentage changes)
Tirpak, M. (2019), Markit, Thomson Financial Datastream, FRED, KITA and ECB
calculations. Latest update: August 2019 (PMI, Philadelphia Semiconductor Index
and US Tech Pulse Index) and July 2019 (Korean semiconductor exports).
Turning to the euro area, real GDP growth slowed from 0.4 percent,
quarter on quarter, in the first quarter of this year, to 0.2 percent in the
second quarter. This slowdown was due to a contraction of net exports,
reflecting the weakness in the external environment, while domestic demand
Consumption is robust and households continue to signal optimism
about their future financial situation (Chart 4). We expect positive
consumption dynamics to continue to be supported by easy financing conditions,
improving household balance sheets, higher disposable income on the back of
fiscal stimulus, further - albeit slowing - employment gains, and rising labour
Chart 4: Retail trade and consumer
confidence (left-hand scale: year-on-year percentage
changes of three-month average; right-hand scale: net percentages)
Eurostat, DG-ECFIN and ECB staff calculations. Latest observations: July 2019
for retail trade and August 2019 for consumer confidence.
The strength of employment growth has been a central feature of
the euro area recovery in recent years and, so far, the labour market has been
relatively resilient to the current slowdown. Employment is still increasing:
the number of people employed has risen by 11.2 million since the employment
trough in mid-2013. The unemployment rate stands at 7.5 percent, its lowest
level since July 2008.
Despite some moderation, surveys such as the purchasing managers' index (PMI) continue to signal positive overall employment growth in the third
quarter. For the construction and services sectors, the PMI employment indices
remain above their long-run averages, pointing to labour market resilience in
sectors less exposed to trade tensions. However, in the more
externally-oriented manufacturing sector, employment indicators have been in
contractionary territory for four months, illustrating that the euro area
labour market is not immune to global developments (Chart 5).
Chart 5: PMI indicator of employment in
the euro area (index level)
Markit. Latest observations in Q2 2019: sector-specific averages of the values
in July and August.
continued threat of protectionism and other geopolitical risks, such as the
possibility of a disorderly Brexit, are clearly weighing on confidence.
Business investment has been slowing down since early 2018 and was relatively
subdued in the first half of this year. The negative effects of persistent
uncertainties on the euro area economy are especially evident in the
manufacturing sector, which is most exposed to trade developments.
me elaborate on the contrast between developments in the manufacturing and
services sectors, which is evident in activity, confidence, employment and
price data. The manufacturing sector has been underperforming the more
domestically oriented services sector since 2018 (Chart 6). The PMI
manufacturing output index has been in contractionary territory for seven
consecutive months, decreasing to 47.4 in the first two months of the third
quarter, compared with an average of 48.5 in the second quarter. By contrast,
the services PMI remains in expansionary territory and has edged higher, on
average, in the third quarter to date, when compared with the previous quarter.
So the gap between weak manufacturing and resilient services activity has
Chart 6: Euro area PMI indices (diffusion
index; 50 = no change)
Markit. Latest observation: August 2019.
While the services sector contributes over 70 percent of total
value added in the euro area, the extended weakness in manufacturing is
weighing considerably on overall activity levels.
addition to its adverse impact at the aggregate level, the slowdown in
manufacturing has an asymmetric effect across member countries and different
sectors. For example, while Germany accounts for 28 percent of euro area GDP,
its contribution to euro area manufacturing value added stands at 39 percent.
By contrast, France represents 21 percent of euro area GDP but only 13 percent
of manufacturing.3 Comparing national business climate indicators shows a
relatively pronounced deterioration of sentiment in Germany, where the Ifo
index for manufacturing has fallen to its lowest level since December 2009
Chart 7: National manufacturing business
climate indicators (difference from long-term average;
Ifo, Insee and Istat. Latest observation: August 2019.
Although the euro area services sector remains resilient, there is
no room for complacency: the longer the weakness in manufacturing persists, the
greater the risk of adverse spillovers to other sectors of the economy. In
Germany, for example, service providers reported in August noticeably less
optimistic expectations for the near future, and have become more pessimistic
in their assessment of the current business situation. Possible knock-on
effects from anaemic industrial activity to other sectors of the economy
therefore need to be closely monitored.
As a result of continued global uncertainties and their impact on
confidence, the short-term growth outlook has been revised down in the latest
ECB staff macroeconomic projections. Real GDP growth is now projected to be 1.1
percent in 2019, 1.2 percent in 2020 and 1.4 percent in 2021. Compared with the
June Eurosystem staff projections, growth for this year was revised down by 0.1
percentage points, and for next year by 0.2 percentage points.
the downward revisions to the growth outlook, the balance of risks remains
tilted to the downside. Furthermore, I would characterise the distribution of
risks as bimodal. In one scenario, global trade tensions and Brexit could be
resolved positively, while in another scenario, trade-related uncertainty could
linger and risks associated with a disorderly Brexit could materialise.
Chart 8: HICP and HICP excluding food and
energy (percentages per annum)
Eurostat and ECB calculations. Notes: HICP stands for harmonised index of
consumer prices. Based on monthly observations. Latest observation: August 2019
Turning to nominal developments, inflation continues to fall short
of expectations (Chart 8). Headline inflation remains well below our
inflation aim, while core inflation has been hovering around 1 percent for an
extended period of time. At one level, the reduction in labour market slack is
translating into higher compensation per employee (Chart 9)4.
the pass-through of higher wages to domestic price pressures remains muted, it
follows that firms are absorbing higher unit labour costs through lower profit
margins (Chart 10).
While the reasons for this limited pass-through have yet to be
fully explained, a contributing factor is the weakness in the manufacturing
sector, as reflected by weaker supply chain price pressures compared with the
services sector. The European Commission's indicators of three-months-ahead
selling price expectations show that they have deteriorated in the
manufacturing sector but have held up well in the services sector (Chart 11).
Chart 9: Phillips Curve-based
decomposition of wage growth into its main drivers (deviations
from mean in year-on-year growth terms and percentage point contributions)
Nickel, C. et al. (eds.) (2019) "Understanding low wage growth in the euro area
and European countries", Occasional Paper Series, No
232, ECB.Notes: Sample from Q1 1995 to Q4 2018. The blue line shows deviations
of compensation per employee growth from its model-implied mean. Contributions
(including residuals) are also shown as deviations from their model-implied
mean. Contributions are derived as in Yellen, J.L. (2015). "Inflation Dynamics
and Monetary Policy", speech at the Philip Gamble Memorial Lecture, University
of Massachusetts, Amherst. Latest observation: Q4 2018.
Chart 10: GDP deflator and contributions (annual
percentage changes, percentage points)
Sources: Eurostat, ECB staff calculations.
Latest observation : Q2 2019.
Chart 11: Share of countries with
short-term selling price expectations below long-term mean (percentages)
European Commission and ECB staff calculations. Notes: Selling price
expectations in manufacturing for three months ahead based on a European
Commission indicator available since 1999 for all euro area countries (except
Luxembourg). The series are shown as two-month moving averages. Latest
observation: August 2019.
market-based indicators of future inflation outcomes have stagnated at
historical lows. For instance, although the likelihood of deflation remains
limited, the market assessment of the probability of low inflation over the
next five years, as derived from options prices, has increased substantially
since the turn of the year (Chart 12).
Chart 12: Option-implied distribution of
average inflation over the next five years (percentages)
Bloomberg, Thomson Reuters and ECB staff calculations. Notes: Probabilities
implied by five-year zero-coupon inflation options, smoothed over five business
days. Risk-neutral probabilities may differ significantly from physical, or
true, probabilities. Latest observation: 12 September 2019.
The ECB staff projections published last week now point to
headline inflation of 1.2 percent in 2019, 1.0 percent in 2020 and 1.5 percent
in 2021. Compared with the June projections, the profile for headline inflation
has been revised down by 0.1 percentage points in 2019 and 2021, and by 0.4
percentage points in 2020. Although the downward revisions to headline
inflation are partly due to the volatile energy component, projections for HICP
inflation excluding food and energy have also been revised down on account of
weaker data outturns, softer activity, indirect effects from lower energy
prices and persistent past over-predictions.
Last week's policy meeting also took place against the background
of a pronounced fall in risk-free rates that we have been observing since the
start of the year. In part, this is a global pattern, with US long-term yields
also declining (Chart 13). This suggests that there is a substantial shared
component in the decline in long-term rates that reflects a significant weight
being attached to sub-par long-term outcomes for growth and inflation across
Chart 13: Ten-year yields of German and US
government bonds (percentages)
Bloomberg and ECB. Latest observation: 10 September 2019.
The downward revision in long-term yields incorporates the
market's assessment that central banks will respond (both in the near term and
the long term) to adverse developments in the inflation outlook by lowering
policy rates and further contributing to the easing of financial conditions
through the compression of term premia (Chart 14).
the lower rates that we have observed have contributed to an overall loosening
of financial conditions since the start of the year, it is important to keep in
mind that long-term rates that are declining due to a deterioration of the
economic outlook, an adverse shift in the risk distribution or revised
calculations of the equilibrium real interest rate offer only limited easing
potential, especially if they are not backed up by active use of the policy
Chart 14: Realised EONIA and forward curve (percentages
At our meeting last week, the Governing Council was hence
confronted with a more extended slowdown of the euro area economy than
previously anticipated, persistent and salient downside risks to the growth
outlook, and a further delay in the convergence of inflation towards our
medium-term inflation aim (Chart 15). The case for a monetary policy response
was clear, and a comprehensive package of measures was judged to be the most
effective way to support the convergence of inflation to our aim.6
Chart 15: Actual and projected HICP
inflation (year-on-year percentage change)
ECB and Eurosystem staff macroeconomic projections.
The policy response to the continued shortfall of inflation from
our aim also reflects our commitment to symmetry in the inflation aim, which we
emphasised in the statement following the Governing Council's July meeting.
This was essentially a clarification of our reaction function: our
determination to act when inflation falls short of our medium-term inflation
aim is just as strong as our determination to act when inflation exceeds that
clearly our commitment to symmetry is important, since the formulation of our
aim -"below, but close to, 2 percent" - risks being misunderstood,
particularly in an environment of falling inflation expectations. We also
stressed in July that both realised and projected inflation have been
persistently below levels that are in line with our aim. This was also an
important facet of our communication because the "close to" formulation of our
inflation aim does not provide a precise numeric anchor for inflation
In line with our commitment to symmetry, the downward revisions to
the projected inflation path warranted a vigorous policy response. We therefore
announced a broad-based set of measures designed to complement each other in
providing monetary stimulus. Our measures will lock in financial conditions
across various segments of the market that are sufficiently supportive to
foster a reacceleration of growth and the anchoring of inflation expectations.
Favourable financing conditions will pass through to the borrowing costs of
businesses and households, which will sustain investment and consumption.
Greater business and household expenditure, in turn, is one key condition for
inflation to converge to our aim. In addition, our policies create a cushion to
insulate the economy from the materialisation of downside risks by reducing
uncertainty about future financing conditions and underpinning confidence.
Let me first outline our adjustments to the instruments that
primarily affect the expected path of short-term interest rates and thereby the
expectations component of long-term interest rates: the level of the key policy
rates and forward guidance on the expected path of these rates.
We decided to lower the interest rate on the deposit facility by
10 basis points to -0.5 percent. In the context of ample excess liquidity, the
deposit facility rate is the anchor for the EONIA market interest rate - which
is the starting point of the monetary policy transmission mechanism. The EONIA
anchors the overnight indexed swap curve in the euro area, which in turn underlies
the pricing of many financial instruments and, in particular, underpins the
reference rates that are important for loan rate fixation. Lowering the deposit
facility rate therefore affects the entire term structure of interest rates
and, ultimately, the funding costs that matter for businesses and households.
Negative rates have supported the portfolio rebalancing channel of the asset
purchase programme (APP) by encouraging banks to lend to the broad economy
instead of holding onto liquidity.7 The impact of the cut in the deposit facility rate on the
term structure of interest rates is reinforced by our forward guidance, which
now strengthens the conditionality criteria for interest rate normalisation.
We strengthened our state-contingent forward guidance in a number
of ways. These enhancements complement our emphasis on symmetry by clarifying
our reaction function with respect to developments in the inflation outlook:
the strengthened guidance provides a clear signpost for rate expectations by
linking our policy to more stringent conditions for the inflation outlook.
Specifically, the guidance now gives a clearer indication of what we want to
see before policy interest rates start to normalise. As communicated last week,
we expect to keep the key ECB interest rates at present or lower levels until
we have seen the inflation outlook robustly converge to a level sufficiently
close to, but below, 2 percent within our projection horizon, and such
convergence has been consistently reflected in underlying inflation dynamics.
This formulation provides a conditionality framework with a number
of elements. First, we want to see inflation rising to a level that is
sufficiently close to, but below, 2 percent. This reflects our communication in
July: realised and projected inflation are too low relative to our aim. Second,
we have preserved the forward-looking formulation of our forward guidance, since
the guidance has a medium-term orientation. This reflects the general principle
that monetary policy takes time to display its full effects and thus should be
forward-looking. Third, we have added two safeguards to anchor the notion of
sustainability, which has always been part of our guidance but is now more
phrase "robustly converge" means that the Governing Council wants to be sure
that the process of convergence is sufficiently mature and realistic before
starting to lift policy rates. The qualification that convergence needs to be "consistently reflected in underlying inflation dynamics" means that the
trajectory of realised inflation should underpin our inflation outlook.
State-contingent forward guidance is especially effective under
conditions of elevated uncertainty since it facilitates a smooth adjustment to
the evolution of macroeconomic and financial conditions in both directions:
expectations about the future policy path will respond in a stabilising manner
to the emergence of positive or negative news.
We also retained the so-called easing bias by stating our
expectation to keep the key ECB interest rates "at present or lower" levels. We
judge that, if needed, we can further lower the deposit facility rate and, with
it, the overnight money market rate. As a result, there is no reason for the
distribution of future short-term rate expectations to be skewed upwards.8 Finally, we dropped the date-based leg of our forward
guidance since the strengthened state-contingent information, which links our
policy more tightly to the inflation outlook, provides sufficient guidance to
markets on the future path of monetary policy.
We also decided to restart net asset purchases at a monthly pace
of Euro 20 billion as from the beginning of November. Our purchases are expected to
run for as long as necessary to reinforce the accommodative impact of our
policy rates, and to end shortly before we start raising the key ECB interest
rates. In addition, we reiterated our intention to continue reinvesting, in
full, maturing principals for an extended period of time past the date when we
start 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
net asset purchases and the revised forward guidance on policy rates also imply
an expansion of the reinvestment envelope and the automatic response of the
reinvestment horizon to the evolution of the inflation outlook. Finally, based
on our projections on the size and evolution of the purchasable universe, we
are confident that the envisaged purchase volumes will be consistent with the
current parameters of the APP for an extended period of time.
Additional net asset purchases and, by implication, the revised
reinvestment horizon reinforce the accommodative impact of our policy rates in
several ways. First, by affecting term premia, net purchases and reinvestment
complement the downward impact on long-term interest rates exerted by our
policy rate forward guidance. The APP therefore provides further support to the
funding costs that matter for businesses and households. Second, asset
purchases entail a signalling channel by demonstrating our commitment to use
all instruments in pursuit of our aim. This not only influences the expected
path of short-term policy rates, and thereby long-term interest rates, it can
also have a powerful effect on the formation of inflation expectations. Third,
the APP entails wealth effects on the balance sheets of banks and other
entities, providing further impetus to investment and consumption.
Fourth, new net purchases and a prolonged reinvestment horizon
mitigate the passive tightening in the monetary policy stance that happens
mechanically as the APP portfolio ages. One of the channels through which asset
purchases work is the duration channel. By absorbing duration risk from the
market, the APP reduces the risk compensation required by investors, which puts
downward pressure on term premia and yields. As the bonds we hold in our
portfolio come closer to maturing, however, the overall amount of duration risk
that is tied up in our portfolio progressively falls. As a result, the downward
impact on risk premia - and thereby on long-term interest rates - resulting
from the duration channel weakens over time. Adding to the stock of asset
purchases - both directly and through the reinvestment channel - will keep this
portfolio ageing effect at bay (Chart 16).9
Chart 16: Estimated effect of APP
recalibration vintages on euro area ten-year term premium (basis
Based on Eser, F., Lemke, W., Nyholm, K., Radde, S. and Vladu, A.L. (2019), "Tracing the impact of the ECB's asset purchase programme on the yield
curve", Working Paper Series, No
2293, ECB.Notes: The chart shows the impact of the APP through the duration
channel on the term premium component of the ten-year sovereign bond yield
(averaged across the four largest euro area countries) over the events cited in
the chart legend. The reinvestment horizon is assumed to be five years starting
in the month after the announced end of net purchases at each point in time.
The chart does not account for the new asset purchases announced in September
To ensure the continued smooth transmission of our monetary policy
stance, we decided to adjust the parameters of the new series of targeted
longer-term refinancing operations (TLTRO III) and announce a two-tier system
for reserve remuneration. Both measures serve to mitigate the risk of possible
side effects of the ECB's accommodative monetary policy stance on bank-based
intermediation undermining the sustained convergence of inflation.
With respect to the TLTROs, we eliminated the 10 basis point
spread over the key policy rates entailed in the initial pricing of the
operations. The interest rate in each operation will now be set at the level of
the average rate applied in the main refinancing operations over the life of
the respective TLTRO. For banks whose eligible net lending exceeds a benchmark,
the rate applied in the TLTRO III operation will be lower, and can be as low as
the average interest rate on the deposit facility prevailing over the life of
the operation. In addition, the maturity of the operations will be extended
from two to three years.
These changes will not only ensure the smooth transmission of
monetary policy, they will also preserve favourable bank lending conditions and
support the accommodative stance of monetary policy. In particular, extending
the maturity from two to three years will better align the operations with the
typical maturity of bank-based financing of investment projects, thereby
enhancing the support that TLTRO III provides to the financing of the real
economy. The adjustments to the TLTRO III parameters signal that the Governing
Council can act in an agile manner and fine-tune its monetary policy instruments,
as needed, to ensure that they are efficient, effective and proportionate to
the risks to price stability.
Complementing the TLTRO III operations, the two-tier system for
reserve remuneration - which will take effect on 30 October 2019 - supports the
bank-based transmission mechanism, as it will mitigate the adverse side effects
of negative interest rates on banks.
system has been calibrated to strike a balance between, on the one hand,
offsetting the direct cost of negative interest rates on bank profitability,
thereby helping to sustain the pass-through of low policy rates to bank lending
rates, and on the other, preserving the positive contribution of negative rates
to the accommodative stance of monetary policy and the continued sustained
convergence of inflation to our aim.
Reconciling these two goals is possible, since the value of funds
in the money market is determined by their cost at the margin. That marginal
cost will continue to be set by the rate on our deposit facility, and it will
not be influenced by the higher remuneration that banks will receive on the
portion of their reserves that will be exempt under the new scheme. The excess
liquidity that will be created in exchange for the additional bond purchases
that start in November will also further increase the non-exempt amount, which
has already been calibrated in such a way as to preserve a high level of
trading activity in the money market.
any case, we will actively monitor conditions in the money market and adjust
parameters as necessary to maintain an active trading environment and to ensure
that the easing effects of a reduction in the overnight interest rate are
transmitted effectively through the entire yield curve.
To sum up, the measures we announced last week complement each
other and together constitute a powerful package. As I previously noted, the
evidence shows that our monetary policy measures have been an effective
response to the environment that the ECB has faced in recent years.10 The cut in the deposit facility rate lowers the anchor for
the entire term structure of interest rates, while the forward guidance on
interest rates steers expectations of the short-term interest rate path. The
forward guidance protects the short to medium-term segment of the yield curve
from unnecessary volatility by eliminating residual uncertainty about the
expected rate path over the forward guidance horizon. In addition, it helps to
steer the long end of the yield curve by affecting the expectations component
of long-term interest rates.
Renewed net asset purchases reinforce the downward pressure on
long-term rates by reducing risk premia, and also complement the impact of
forward guidance on the expected short-term rate path by signalling the
Governing Council's commitment to maintain a highly accommodative monetary
policy stance for a prolonged period of time. New net asset purchases will also
mitigate the mechanical upward pressure on long-term rates that ensues from the
gradual ageing of our portfolio and the associated loss of duration. Both the
net asset purchase horizon and the reinvestment horizon are linked to our
interest rates. They will therefore adjust dynamically to changes in the inflation
outlook and work in the background to keep a lid on medium to long-term
interest rates. Meanwhile, the changes in the TLTRO III parameters and the
two-tier system for reserve remuneration will ensure that lower market interest
rates are effectively passed through to the interest rates banks charge their
The convergence of inflation towards the Governing Council's aim
has recently slowed and partly reversed. The comprehensive package of measures
decided last week will help to support the convergence of inflation to levels
that are below, but close to, 2 percent in a sustained manner. Our policy
decisions will affect inflation by supporting favourable financing conditions,
and thereby growth, as well as by underpinning inflation expectations.
is clear that a highly accommodative stance of monetary policy will be
necessary for a prolonged period of time. Forward guidance on the key ECB
policy rates is a very powerful instrument and remains our principal tool,
together with the level of our key policy rates, for adjusting the monetary
policy stance. The asset purchase programme is an important complement to our
interest rate policy and will dynamically adjust in line with our policy rate
Backed by our assessment of the empirical evidence, we are
confident that our monetary policy measures remain effective in fostering a
reacceleration of growth and, thereby, inflation convergence, and we are
determined to adjust all of our instruments, as appropriate, to ensure that
inflation converges durably to our aim, in line with our commitment to symmetry.
The ECB's mandate for price stability is unconditional, and the Governing
Council is unwavering in its commitment to achieve its inflation aim.
Finally, as I have outlined today, our monetary policy decisions
are driven by our assessment of the macroeconomic and financial environment. As
noted in last week's introductory statement, other policy pillars play a
critical role in determining the long-term and short-term prospects for the
euro area economy. Growth-enhancing institutional and structural reforms and a
more growth-friendly composition of public finances can play important roles in
boosting the long-run potential of the euro area economy. At the cyclical
level, fiscal policy can contain the impact of adverse shocks through the
operation of automatic stabilisers and, where feasible and effective, through
the timing of discretionary fiscal measures. All else being equal, the more
fiscal policy contributes to boosting long-term growth potential and providing
cyclical stabilisation, the quicker will be the effects of monetary policy
interventions on inflation and the economy.
After the procyclical tightening of the aggregate fiscal stance in
response to the euro area sovereign debt crisis, and a neutral stance during
the economic upswing, the current mildly expansionary euro area fiscal stance
is providing some support to economic activity (Charts 17 and 18).
Chart 17: Euro area fiscal stance and
change in output gap (percentage points)
AMECO database (European Commission spring forecast). Note: The fiscal stance
is approximated by a change in the ratio to GDP of the cyclically adjusted
Chart 18: Contributions to euro area real
GDP growth (annual GDP growth in percentages;
contributions in percentage points)
September 2019 ECB staff macroeconomic projections.
In view of the weakening economic outlook and the continued
prominence of downside risks, governments with fiscal space that are facing a
slowdown should act in an effective and timely manner. Where fiscal
sustainability is ensured, the potential effectiveness of countercyclical
fiscal policy is reinforced in the current environment, given that fiscal
multipliers are higher in a low interest rate environment. At the same time,
governments in countries with high public debt should pursue prudent policies
and deliver on structural balance targets.
- I would like to thank Danielle Kedan for her
contribution to this speech.
- See Tirpak, M. (2019), "What the maturing tech
cycle signals for the global economy", Economic
Bulletin, Issue 3, ECB.
- Italy's contributions to euro area GDP and
manufacturing amount to around 15 percent each, while Spain makes up 11 percent
of GDP and 9 percent of manufacturing value added.
- For a detailed analysis of euro area wage
developments, see Nickel, C. et al. (eds.) (2019) "Understanding low wage
growth in the euro area and European countries", Occasional
Paper Series, No 232, ECB.
- The recent Jackson Hole paper by Jorda, O. and
Taylor, A.M. (2019) provides an analysis of the inter-relationships between
long-term rates, short-term policy rates, macroeconomic variables and the
measurement of the policy stance.
- For an empirical review of the effectiveness of
the different elements of the ECB's monetary policy toolkit and the sources of
complementarities across these instruments see my recent speech "Monetary
Policy and Below-Target Inflation", Bank of Finland conference on Monetary
Policy and Future of EMU, 2 July.
- See Ryan, E. and Whelan, K. (2019), "Quantitative Easing and the Hot Potato Effect: Evidence from Euro Area Banks", Research Technical Paper, No 1, Vol
2019, Central Bank of Ireland; and Demiralp, S., Eisenschmidt, J. and
Vlassopoulos, T. (2019), "Negative interest rates, excess liquidity and retail
deposits: banks' reaction to unconventional monetary policy in the euro area", Working Paper Series, No 2283, ECB.
- For further discussion, see my recent speech "Monetary Policy and Below-Target Inflation", Bank of Finland conference on
Monetary Policy and Future of EMU, 2 July.
- For further discussion, see ECB (2019), "Taking
stock of the Eurosystemâ€™s asset purchase programme after the end of net asset
purchases", Economic Bulletin,
-  For further discussion, see my recent speech "Monetary Policy and Below-Target Inflation", Bank of Finland conference on
Monetary Policy and Future of EMU, 2 July.
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Christine Lagarde Is Picked as ECB's New President.
What Does the Bank Do? - Jul 03, 2019
Eurozone 2019 Growth Forecast Cut to 1%; ECB Could Restart
QE - Feb 19, 2019
ECB Must Allow Full Scrutiny Of Banking Supervision,
Say The European Court of Auditors - Jan 14, 2019
Eurozone Bond Market to See Major Shift as ECB QE Ends - Oct 29, 2018
ECB Publishes European Framework For Testing Financial
Sector Resilience To Cyber Attacks - May 03, 2018
The Growing Challenges For Monetary Policy In The Current Int'l Monetary
And Financial System
8. Broadest Shift in Global Monetary Policy Direction Since 2009
9. Personal Statements By The MPC Members At The 125 MPC Meeting Of July
10. Easy Money: Time to Create Buffers
11. Post MPC Analysis: A Second Look At CBN's July 2019 Monetary Policy - Intent and Impact
12. CBN Communique No. 125 of the MPC Meeting - July 22-23, 2019
13. MPC Maintains Status Quo After July 2019 Meeting
14. Small Movement In Real Economy Rates
15. The MPC Set to Hold its Fire This Week
16. MPC Preview: Growth Concern to Spur Dovish Stance
17. CBN's 5-Year Plan: Same Direction; More Dimensions
18. Monetary Authority Of Singapore 2018-19 Annual Report - Looking Ahead
19. Thoughts on CBN's 5-Year Monetary Policy Blueprint (Re: Monetary
20. Implications of CBN's Five-Year Policy Thrust
21. Godwin Emefiele Unveils The 5-Year Policy Thrust of Nigeria's Central
Bank 2019 - 2024
22. Personal Statements By The MPC Members At The 124 MPC Meeting of May
23. Federal Reserve Reviews Its Monetary Policy Strategy Tools And
24. Egypt's Central Bank Keeps Key Interest Rates Unchanged
25. Monetary Policy Decisions Across Africa
26. CBN Communique No. 124 of the MPC Meeting - May 20-21, 2019