Monetary policy

The favourable outlook for the global economy is overshadowed by the threat of protectionism. In the euro area growth has picked up. Some of this acceleration is on a sustainable basis, but long-term growth is likely to remain slower than pre-crisis growth.

In the aftermath of the global financial crisis many central banks cut their policy rates close to zero and introduced non-standard monetary policy measures. The new situation has also presented a challenge for monetary policy modelling.

The bank-sovereign nexus has weakened, but we cannot consider it to be broken.

The euro area economy is growing, supported by monetary policy. Confidence in the economy is strong, and investment and employment are both growing. On the other hand, there still remain problems from the financial and debt crises, and the pace of structural reform has slowed.

The US economy has recovered from the financial crisis. Beginning in October, the Fed will reduce the holdings of securities on its balance sheet that it had purchased in its securities purchase programmes.

A number of variations can be formed of the Taylor rule, all of which are simplifications. Monetary policy decisions cannot, however, be taken solely on the basis of simple rules.

By promising low interest rates in the future, a central bank can provide stimulus for the economy today. The effectiveness of this kind of forward guidance can be assessed by the impact it has on market expectations regarding interest rates.

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.