Olli Rehn: Economic outlook and monetary policy - a European
perspective
Talk by Mr Olli Rehn, Governor of the Bank of Finland, at the Council on Foreign Relations, New
York City, 17 April 2019.
* * *
Ladies and Gentlemen,
Good morning to everybody. Many thanks for the invitation to give a talk at the Council on Foreign
Relations, which does immensely valuable work to keep the flame of rules-based multilateralism
and the liberal international order alive, in a rather challenging political environment. Hence it is a
great honor and pleasure to address and discuss with you today.
In my opening remarks I will focus on the economic outlook and monetary policy in Europe. After
that I am glad to take questions and comments.
Let us recall what has happened since we tamed the crisis. During the euro area recovery since
2013, over 10 million new jobs have been created, and unemployment has fallen from its peak of
over 12 percent to below 8 percent. The banking sector is now more resilient, the amount of
nonperforming loans in banks have decreased significantly, and lending to households and
nonfinancial corporations have increased. The ECB's accommodative monetary policy has been
very important in facilitating and supporting the recovery.
Following the economic recovery and the then positive economic outlook, the discussion on
monetary policy normalization began to proceed in the euro area in 2018. In June 2018, the ECB
Governing Council expected to end the net purchases of monetary policy at the end of 2018. At
that time, the decision was still conditional and dependent on inflation.
At its meeting in December 2018, the Governing Council of the ECB decided to end net
purchases in the asset purchase program at the end of the year. At the same time, the
Governing Council announced that it will continue to invest the maturing bonds fully for an
extended period of time after the ECB Governing Council has raised the ECB's key interest
rates, and in any case as long as it is necessary to maintain a favorable liquidity situation and
accommodative monetary policy that supports growth and converges inflation to the ECB's goal
of close but below 2 percent. The policy rates were expected to remain at their current levels
through the summer of 2019.
Since then, the incoming data during the first months of 2019 have confirmed that global
economic activity has slowed down, which is now felt also in the euro area. Prevailing
uncertainty, stemming from the US-China trade tensions, slowdown of growth in China and
Europe's internal problems, have all weakened the outlook for the economy. The growth
forecasts for the current year have broadly been revised downwards, also for the euro area by
the ECB staff in March. While some indicators hint for stabilization, much of the recent data
continue to be weak, especially for the manufacturing sector. There are both country- and
sectorspecific factors, and the impact of these factors is turning out to be somewhat longer-lasting,
slowing down growth momentum during the current year.
The slowdown of growth has been accompanied with moderating inflation. In March 2019, the
ECB staff forecasted inflation to slow down to 1.2 percent in 2019 and then reaching 1.6 percent
by 2021. Consistently with the weaker outlook, the market-based inflation expectations have
declined.
As a consequence of the slowdown, (almost) all major central banks have had to put monetary
policy normalisation on hold and instead to maintain an accommodative policy stance. This holds
true for the ECB as well.
On the back of the weakened economic outlook, the ECB Governing Council in March and again
th
last week, on April 10 , took a number of decisions in the pursuit of its price stability objective.
First, a commitment to keep the key policy interest rates at their present low levels at least until
the end of 2019. Second, a commitment to continue reinvesting maturing securities under the
asset purchase programme for an extended period of time, beyond the first rate increase - thus
we apply chained forward guidance on these two policy instruments. And third, launching a new
series of targeted longer-term refinancing operations (TLTRO-III), starting in September 2019.
Hence, the ECB Governing Council maintains an ample degree of monetary accommodation to
support the economic expansion. Significant monetary policy stimulus is indeed being provided
by our forward guidance on the key ECB interest rates, reinvestments by a sizable stock of
acquired assets, and the new series of targeted long-term refinancing operations.
Moreover, as President Draghi said, the Governing Council stands ready to adjust all of its
instruments, as appropriate, so that inflation converges to our aim, which is below but close to
2% in a sustained manner. It is worth noting that our inflation aim does not imply a ceiling at 2%,
since inflation can deviate from our target in both directions.
At the same time, it needs to be asked whether a more even balance between monetary and
fiscal policy stances would be desirable in order to sustain the growth momentum in the current
conjuncture. In our view it should be underlined that, in order to reap the full benefits from the
ECB's monetary policy measures, other policy areas must contribute more decisively to raise
the growth potential and reduce vulnerabilities. For the longer term, implementation of structural
reforms is key to boost euro area productivity and growth potential. Regarding fiscal policies, the
mildly expansionary euro area fiscal stance today and the operation of automatic stabilisers are
already providing support to economic activity.
If the slowdown is judged more stubborn, any further fiscal easing should be undertaken within
the limits of debt sustainability and be differentiated according to fiscal space available. In other
words, while countries with elevated public debt levels should focus on consistent consolidation
of public finances, those with available fiscal space could use it to increase growth-enhancing
public investment. In this way, one would enable a more balanced macroeconomic policy mix.
Applying the already worn saying, monetary policy should indeed not be the only active player in
town.
Finally, a word on the longer-term. The ECB - much like other central banks - must operate in
an environment where long run trends, such as population aging, lower long term interest rates,
climate change and concerns about inequality, can have important societal effects. The central
banking community needs to understand the implications of these phenomena to growth,
employment and inflation dynamics, in order to deliver more effectively what is in their mandate.
That's why we need to systematically assess how these transformations affect monetary policy
strategy.
Many thanks for your attention, and I am ready to take your questions.