The outlook for monetary policy Substantial accommodation is still needed to secure the path of inflation convergence and this is reflected in our past monetary policy decisions. In parallel to winding down net purchases, we have strengthened our forward guidance on interest rates and bond reinvestments. This has allowed us to rotate the instruments used to set the policy stance, while leaving the stance itself broadly unchanged. Our forward guidance framework has been specifically designed to accompany the economy by facilitating needed adjustments in the policy stance as the outlook evolves. It works along three main dimensions. First, the state-based leg of our guidance ensures that interest rate expectations are anchored to our ultimate inflation objective, and thereby acts as an “automatic stabiliser” in the event of downside risks emerging. Second, the date-based leg provides extra information to focus rate expectations over the near term. Third, since our forward guidance on reinvestments is tied to our guidance on rates, adjustments to rate guidance automatically entail a change of the reinvestment horizon in the same direction. This reinforces the easing impact of a flatter expected rate path by compressing the term 4/6  BIS central bankers' speeches  premium component of longer-term interest rates. We will continue monitoring how banks can maintain healthy earning conditions while net interest margins are compressed. And, if necessary, we need to reflect on possible measures that can preserve the favourable implications of negative rates for the economy, while mitigating the side effects, if any.

During the four euro area business cycle expansions since 1970, there have been 50 soft patches – defined as a two-quarter growth slowdown – and only 4 recessions.4 In fact, the euro area faced an analogous situation in 2016, when the economy also went through a soft patch triggered by a contraction in world trade. At that time, the strength of the domestic economy was able to shield the recovery from external uncertainties. The key question is whether, with monetary policy continuing to support the expansion, domestic 1/6  BIS central bankers' speeches  demand will remain as resilient today. The demand component typically affected most by a weaker global environment is investment. ECB internal analysis shows that the more exposed euro area listed firms are to foreign markets, the more sensitive they are to uncertainty when making their investment decisions. And there are some signs that external demand may be affecting investment via manufacturing value chains within the euro area. In particular, both extra and intra-euro area trade slowed steeply last year, whereas in 2016 intraeuro area trade was robust to the external slowdown. Such a recoupling of intra- and extra-euro area trade growth in a downward direction has not occurred since the start of the global financial crisis. Intra-euro area exports of intermediate and capital goods were hit particularly hard, with capital goods exports registering their strongest contraction since the sovereign debt crisis. A further rise in global uncertainty could therefore lead to a deceleration in trade and investment.