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More specifically, declining trend growth on the back of slowing productivity growth and an ageing population, and the legacy of the financial crisis have driven interest rates down. This low interest rate and low inflation environment has significantly reduced the scope for the ECB and other central banks worldwide to ease monetary policy in the face of an economic downturn. And structural challenges, such as new threats to environmental sustainability, rapid digitalisation, globalisation and evolving financial structures, have also affected price developments and, therefore, the environment that central banks monitor, forecast and need to factor into their policies.
In the light of these changes, now is the appropriate time for us to conduct a strategy review with a broad scope to ensure we continue to deliver on our mandate in the best interest of Europeans. [...]
The euro area economy and the appropriateness of the ECB’s monetary policy stance
Broadly in line with our expectations, the euro area economy continues to grow, though still with modest momentum.
The domestic economy remains relatively resilient. Private consumption, for instance, increased by 0.5% in the third quarter of 2019 on the back of further improvements in labour market conditions. The unemployment rate stands at 7.4%, its lowest since July 2008. The number of people employed keeps increasing and has increased by more than 11 million since mid-2013. The more domestically-oriented services and construction sectors also continue to hold up well.
Yet, global factors weigh on euro area growth.
To be sure, there are tentative signs of stabilisation. Forward-looking indicators have become in slightly more optimistic, as the Purchasing Managers’ Index on manufacturing business expectations in 12 months’ time have increased in the five consecutive months through January to the highest level in 18 month. Moreover, while uncertainties surrounding the global economic environment remain elevated, those related to trade tensions between the United States and China are receding. Other risks, however, are still lingering or – as for the uncertainty surrounding the impact of the coronavirus – are a renewed source of concern.
The overall moderate growth performance is delaying the pass-through from wage increases to prices and inflation developments remain subdued. Inflation measured by the (flash) Harmonised Index of Consumer Prices stood at 1.4% in January, in line with our expectations.
The euro area economy therefore continues to require support from our monetary policy, which provides a shield from global headwinds.
We see that our policy stimulus is being passed on to the financing conditions most relevant for the real economy. According to latest data, lending rates for businesses are almost 10 basis points lower than they were one year ago, and for households for house purchases they are almost 40 basis points lower and close to their historical lows.
These favourable financing conditions in turn continue to support business investment and consumer and construction spending in the euro area, partially offsetting the negative impact from sluggish developments in global demand.
At the same time, we continue to closely monitor the potential side effects of our measures.
Low interest rates bring a lot of benefits to the euro area economy. That being said, low funding costs appear to have also encouraged more borrowing by highly leveraged firms and greater risk-taking by non-banks, such as investment funds, insurance companies and pension funds. In addition, property markets in a number of euro area countries have seen persistently rising prices, although the low interest rate environment is only one among many factors influencing the choice to borrow for house purchase.
In this environment, authorities should continue to use targeted macroprudential measures to address the associated risks to financial stability. At the same time, fiscal and structural policies also have an important role to play in a low interest rate environment. They can lift the growth momentum and boost potential through higher productivity growth. This would, in turn, support the effectiveness of our measures and also help interest rates to rise again in due time. [...]