Monetary policy meeting of the Governing Council of the ECB: First outline of strategic review of monetary policy

Boštjan Vasle, Governor of the Bank of Slovenia, attended the ECB’s Governing Council’s monetary policy meeting as normal, which was held in Frankfurt yesterday. The meeting focused on launching the strategic review of monetary policy planned for 2020. Members of the Governing Council also reviewed the economic indicators, which suggest that there were signs of economic growth stabilising in the euro area at the end of the year, while the mood on the financial markets remained good. In light of these developments, the Governing Council left its monetary policy stance unaltered.

Yesterday the Governing Council launched its strategic review of monetary policy in 2020, which is expected to be completed by the end of the year. The last changes were made in 2003, since which the European economy has undergone profound structural changes and a financial crisis. All of this has gradually been reflected in record low interest rates, reducing the scope for the ECB’s toolkit of conventional measures to mitigate shocks to the economy. In addition, monetary policy now operates in very different circumstances, dictated by environmental risks, rapid digitalisation, globalisation and fast-evolving financial structures.

“In these circumstances, the Governing Council has decided to launch a strategic review of monetary policy. In this way we will (i) examine how we define and attain the inflation target, (ii) review the instruments we use to do so, (iii) review the economic and monetary analysis and the methods of communication used, and (iv) reassess monetary policy’s broader impact on financial stability, employment and environmental sustainability. The review will also have a clear place for engaging with bankers and economists, civil society and other stakeholders,” said Mr Vasle, summarising the key objectives.

Continuation of moderate economic growth at the end of last year

Economic indicators and survey data point to positive but low economic growth in the euro area in the final quarter of last year. Growth is still largely being affected by the weakness of international trade, and the increased uncertainty coming from geopolitical risks, rising protectionism, and the growing vulnerability of emerging markets, China in particular. At the same time there is stable growth in services and construction, whose primary focus is the domestic market. The labour market remains robust. Annual inflation in the euro area stood at 1.3% in December, up 0.3 percentage points on November. The rise in inflation was driven by oil-based energy prices, food prices and prices of industrial goods. It continues to be supported by wage growth in the euro area, which remains robust.

“Growth in Slovenia slowed again in the final quarter, according to the available monthly indicators, but the economic picture remains better than the euro area average, with slightly higher growth and inflation,” said Mr Vasle.

The situation on the financial markets is easing further. The risk-free interest rate benchmarks did rise, driven by slightly higher inflation expectations in addition to the increased optimism on the market. By contrast, share indices reached new highs, while the risk premiums on higher-risk instruments declined further. Furthermore, demand for credit from the real economy is still satisfactory, while there is particularly strong corporate borrowing via the capital market, where borrowing maturities are lengthening. Monetary policy will keep the financial markets accommodative in the future, in line with the price stability objective.

Seasonal demand for short-term liquidity increased slightly at the end of the year as expected, but less than in previous years. This is further evidence of the good liquidity situation on the market, which is backed by monetary policy measures.

“Our assessment is that the full spectrum of measures adopted in September 2019 is ensuring that monetary policy is appropriately accommodative,” said Mr Vasle in summing up the conclusions of the monetary policy meeting.