Indeed, GDP in the area was flat in the second quarter of this year, although this figure reflects transitory factors whose influence is still difficult to assess. In any event, most analysts predict weak growth in the euro area both this year and next, with highly uneven rates across countries and significant downside risks. Euro area inflation is ultimately moving at figures far removed from the 2% reference which, in the medium term, is the monetary policy objective for the area. With inflation rates  BIS central bankers’ speeches  1  standing roughly at scarcely 0.5% and a macroeconomic scenario marked by sluggish demand, the dangers of a downturn in inflation expectations have become increasingly more patent, increasing the risks to recovery. The European Central Bank has responded to these risks with additional measures that have further accentuated the expansionary nature of euro area monetary policy, thereby placing itself apart from the trajectory initiated by the Federal Reserve and the Bank of England. At its June and September meetings this year, the ECB Governing Council adopted an array of expansionary measures which, once again, combine conventional and other exceptional and unconventional actions. On the conventional front, the ECB once again reduced its official interest rates. The main refinancing operations rate was cut to 0.05%, a level which technically marks the minimum possible bound for this type of interest rate. The marginal credit facility and deposit rates were cut by a similar amount (10 basis points) to stand, respectively, at 0.30% and –0.20%.

The budgetary cost of this reform will be relatively lower in 2015, although it will have a greater impact, naturally, once it has been set fully in place. The budgetary projection indicates that this forgone revenue will be offset by the greater buoyancy of revenue against a background of strengthening recovery, particularly in domestic demand. The uncertainty habitually clouding estimates of the impact of tax changes will require a continuous monitoring of revenue-raising in 2015 so as to head off potential slippage and, where appropriate, to react in time so as to prevent such slippage from adversely impacting budget deficit targets. 4  BIS central bankers’ speeches  The public debt/GDP ratio will continue on an upward trend, until reaching 100.3% according to the official forecast. The scale of this figure highlights the challenge facing budgetary policy in Spain, which will have to continue prioritising the gradual reduction of this debt. Outlook and challenges The outlook for the Spanish economy is brighter than that which I outlined to this Committee a year back. The rebalancing of domestic expenditure and net external demand has continued, with greater vigour than was previously expected. The pick-up in employment is proving to be one of the main drivers of domestic demand, attesting to the role that the labour market reform and wage restraint are playing in entrenching the recovery, although unemployment remains unacceptably high. But this scenario of recovery is not free from risks. Some, particularly those stemming from the external environment, have increased in recent months.