Yves Mersch: The European Central Bank's monetary policy
stance
Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, at an
MNI connect event, Singapore, 25 July 2017.
* * *
The global recovery is firming and broadening. And the ongoing economic expansion in the euro
area provides confidence.
But while inflation will gradually head to levels in line with our definition of price stability in the
midterm, it has yet to translate into stronger inflation dynamics. Headline inflation is dampened by the
weakness in energy prices. Moreover, measures of underlying inflation remain overall at subdued
levels. Therefore, as I pointed out yesterday in my oral presentation at the Bank Negara Malaysia
Monetary Policy Conference, a very substantial degree of monetary accommodation is still
needed for underlying inflation pressures to gradually build up and support headline inflation
developments in the medium term.
Let me provide you with some details of the ongoing recovery. Euro area real GDP increased by
0.6%, quarter on quarter, in the first quarter of 2017, after 0.5% in the last quarter of 2016.
Incoming data, notably survey results, continue to point to solid, broad-based growth in the period
ahead. The pass-through of our monetary policy measures is supporting domestic demand and
has facilitated the deleveraging process. The recovery in investment continues to benefit from
very favourable financing conditions and improvements in corporate profitability. Private
consumption is supported by employment gains, which are also benefiting from past labour
market reforms, and by increasing household wealth. Moreover, the global recovery should
increasingly lend support to trade and euro area exports. However, economic growth prospects
continue to be dampened by a slow pace of implementation of structural reforms, particularly in
product markets, and by remaining balance sheet adjustment needs in a number of sectors,
notwithstanding ongoing improvements.
The risks surrounding the euro area growth outlook might be upward in the short term, but are
overall broadly balanced. On the one hand, the current positive cyclical momentum increases the
chances of a stronger than expected economic upswing. On the other hand, downside risks
primarily relating to global factors continue to exist.
The thread of deflation is gone and reflationary forces are at play. Prices pressures in the early
stages of the pricing chain remain strong but have still not transmitted to the later stages. Euro
area annual HICP inflation was 1.3% in June, down slightly from 1.4% in May, mainly due to lower
energy price inflation. Looking ahead, on the basis of current futures prices for oil, headline
inflation is likely to remain around current levels in the coming months. In these conditions, we
can be more assured about the return of inflation to our objective than we were a few years ago.
At the same time, measures of underlying inflation remain low and have yet to show convincing
signs of a pick-up, as domestic cost pressures, including wage growth, are still subdued:
although compensation per hour worked is rising, compensation per employee remains flat. This
divergence goes back, at least in part, to the increased fragmentation of labour time. In the labour
market technological advance, in particular the use of the internet allows for more services being
offered with less intermediation at lower prices.
Underlying inflation in the euro area is expected to rise only gradually over the medium term,
supported by our monetary policy measures, the continuing economic expansion and the
corresponding gradual absorption of economic slack.
Also broad money (M3) continues to expand at a robust pace, with an annual rate of growth of
5.0% in May 2017, after 4.9% in April. As in previous months, annual growth in M3 was mainly
supported by its most liquid components, with the narrow monetary aggregate M1 expanding at
an annual rate of 9.3% in May 2017, unchanged from April.
The recovery in the growth of loans to the private sector observed since the beginning of 2014 is
proceeding. The annual growth rate of loans to non-financial corporations remained stable at
2.4% in May 2017, while the annual growth rate of loans to households increased to 2.6%, from
2.4% in April. The euro area bank lending survey for the second quarter of 2017 indicates that
credit standards for loans to enterprises and loans to households for house purchase have
further eased and that loan growth continues to be supported by increasing demand. The
passthrough of the monetary policy measures put in place since June 2014 continues to significantly
support borrowing conditions for firms and households and credit flows across the euro area.
The cross-check of the outcome of the economic analysis with the signals coming from the
monetary analysis confirmed the need for a continued very substantial degree of monetary
accommodation to secure a sustained return of inflation rates towards levels that are below, but
close to, 2%.
In order to reap the full benefits from our monetary policy measures, other policy areas must
contribute decisively to strengthening the longer-term growth potential and reducing
vulnerabilities. Political winds are becoming tailwinds. There is newfound confidence in the
reform process, and newfound support for European cohesion, which could help unleash
pentup demand and investment, if confirmed by decisive action.
Still, the implementation of structural reforms needs to be substantially stepped up to increase
resilience, reduce structural unemployment and boost productivity growth. Regarding fiscal
policies, all countries would benefit from intensifying efforts towards achieving a more
growthfriendly composition of public finances. A full, transparent and consistent implementation of the
Stability and Growth Pact and of the macroeconomic imbalances procedure over time and
across countries remains essential to bolster the resilience of the euro area economy.