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, slow

and especially since 1996, canadian businesses have been investing heavily in machinery, equipment, and software, much of which embodies the latest technologies. this should raise productivity in canada and allow our economy to grow faster than it otherwise would. but, at this point, it is difficult to tell by how much, whether some of the gains are already in, or whether most are still to come. so far, our statistics yield little direct evidence of a substantial pickup in productivity growth, although recent historical revisions to the national accounts show somewhat larger gains than before. because of this uncertainty, the bank is taking a cautious approach to projecting a permanently higher rate of growth in our economy ’ s capacity to produce. but we certainly do not want to dismiss this possibility either. that is why we are following closely a wider - than - usual range of indicators that could tell us what is happening on the supply side and give us early - warning signs of pressure on capacity and prices. for example, we watch for unexpected movements in the underlying trend of inflation and for changes in expectations of future inflation. we also look at commodity prices, wage settlements, reports of shortages in product and labour markets, the growth of money and credit, and information from the bank ’ s business contacts across canada. take, for instance, our best estimate of the trend of inflation - what we call core inflation. this is a measure that takes out of the consumer price index the fluctuations caused by the very volatile energy and food components and the effects of changes in indirect taxes. by this measure, inflation has been somewhat lower than we had expected since late last year. this very favourable price performance suggests that our economy has not been pressing as hard against capacity as we had thought. it gives us some more room to explore where the limits of that capacity really are. and this should give businesses a greater opportunity to exploit their new equipment and technology to the fullest. nonetheless, we must not be lulled into thinking that the threat of inflation has disappeared. given the strong momentum and high levels of activity in our economy, and given the time that it takes for monetary policy actions to affect output and prices, the bank must remain vigilant. nothing will bring the present expansion to an abrupt halt more quickly than an outbreak of inflation. assessing the balance between total demand and supply in the economy and the implications for inflation will be an ongoing challenge for monetary policy. i can assure you that the bank is fully committed to the task - because keeping inflation low