Monetary policy

Repo rates are at an exceptionally low level, and market participants are only just growing accustomed to the post-financial crisis environment.

The flexibility of relative prices constitutes a key element of the dynamics of the economy. The same inflation rate may mask very different trends in relative prices.

Inflation has recently accelerated largely due to the rise in the price of oil. When assessing the medium-term trend in inflation it is important to consider core inflation, which better reflects the euro area’s internal cost pressures.

The euro area economy has now benefited from four years of unbroken growth, and this is expected to continue. The evolution of the global economy will be affected by the economic policy of the new US administration. A potential increase in protectionist actions may impair the expansion of the global economy and trade.

Estimated on the basis of inflation swaps, euro area inflation expectations have increased. Interpretation of inflation swaps is not, however, a straightforward matter, as the price of an inflation swap can be affected by, for example, its risk level.

The expanded asset purchase programme has also had a significant effect on price developments: in its absence, inflation in 2016 would have been much slower.

In March 2016, the Governing Council of the ECB also included corporate bonds in the expanded asset purchase programme. The purchases are carried out by six national central banks, including the Bank of Finland, acting on behalf of the Eurosystem.

During the last 10 years, the natural rate of interest in the advanced economies is estimated to have declined substantially. However, estimates of the level of the natural rate of interest are uncertain, which hampers the use of this interest rate as a monetary policy guide.

The effects of Brexit on the real economy will be evident only later. Three months after the referendum, the UK has still not notified the European Council of its intention to leave and is still an official EU member state.

Euro area monetary policy has been relaxed substantially in recent years. The expanded asset purchase programme has progressed according to plan and brought about a broadly based reduction in interest rates in the euro area.

Japan’s economy has so far been growing sluggishly, but the deflationary trend has been successfully cut and structural reforms taken forward.

The euro area economy has continued to recover. Despite the positive developments, inflation in 2015 was zero. The low inflation is primarily due to the low price of oil.

Major central banks have cut interest rates close to zero and introduced non-standard policy measures. What are the theoretical foundations of these policies and what do we know about their effects on financial asset prices?

The ’Great Recession’ has lasted seven years now, with a permanent weakening in economic growth. Structural reforms are now needed to kick-start growth.

Euro area monetary policy has been highly accommodative, and the euro area economy is getting back on track. An abrupt halt in the Chinese economy would be the greatest risk to euro area growth. The articles were first published in Finnish on 24 September 2015.

The strengthening of economic growth via monetary policy measures does also support financial stability.