ECB ECONOMIC BULLETIN (February)

(Bloomberg) — The following is the text of the overview of
the European Central Bank’s latest Economic Bulletin:
The incoming information that has become available since
the Governing Council’s decision to end net asset purchases in
December 2018 has continued to be weaker than expected on
account of softer external demand and some country and sector-
specific factors. In particular, the persistence of
uncertainties relating to geopolitical factors and the threat of
protectionism is weighing on economic sentiment.
At the same time, supportive financing conditions,
favourable labour market dynamics and rising wage growth
continue to underpin the euro area expansion and gradually
rising inflation pressures. This underlying strength of the
economy supports the Governing Council’s confidence in the
continued sustained convergence of inflation to levels that are
below, but close to, 2% over the medium term. Nevertheless,
significant monetary policy stimulus remains essential to
support the further build-up of domestic price pressures and
headline inflation developments over the medium term. This will
be provided by the Governing Council’s forward guidance on the
key ECB interest rates, reinforced by the reinvestments of the
sizeable stock of acquired assets. The Governing Council
confirmed that it stands ready to adjust all of its instruments,
as appropriate, to ensure that inflation continues to move
towards the Governing Council’s inflation aim in a sustained
manner.
The global economic growth momentum has slowed recently
amid geopolitical uncertainties and vulnerabilities in emerging
markets. Global trade decelerated towards the end of 2018 as
downside risks related to unresolved trade disputes remained
prominent and growth in emerging markets slowed down. While
financial conditions are favourable overall, the weaker global
growth momentum has fuelled stock market volatility. A more
accommodative monetary policy stance has been taken in China in
the light of the slowing growth momentum.
Euro area government bond yields declined somewhat as
global risk-free rates decreased and sovereign bond spreads in
the euro area remained stable. Despite heightened intra-period
volatility, equity prices in the euro area stayed, overall,
broadly unchanged. Similarly, yield spreads on corporate bonds
increased only modestly. In foreign exchange markets, the euro
depreciated in trade-weighted terms.
Euro area real GDP increased by 0.2%, quarter on quarter,
in the third quarter of 2018, following growth of 0.4% in the
previous two quarters. Incoming data have continued to be weaker
than expected resulting from a slowdown in external demand which
was compounded by several country and sector-specific factors.
While the impact of some of these factors is expected to fade,
the near-term growth momentum is likely to be weaker than
previously anticipated. Looking ahead, the euro area expansion
will continue to be supported by favourable financing
conditions, further employment gains and rising wages, lower
energy prices, and the ongoing – albeit somewhat slower –
expansion in global activity.
Euro area annual HICP inflation declined to 1.6% in
December 2018, from 1.9% in November, reflecting mainly lower
energy price inflation. On the basis of current futures prices
for oil, headline inflation is likely to decline further over
the coming months. Measures of underlying inflation remain
generally muted, but labour cost pressures are continuing to
strengthen and broaden amid high levels of capacity utilisation
and tightening labour markets. Looking ahead, underlying
inflation is expected to increase over the medium term,
supported by the ECB’s monetary policy measures, the ongoing
economic expansion and rising wage growth.
Overall, the risks surrounding the euro area growth outlook
have moved to the downside on account of the persistence of
uncertainties related to geopolitical factors and the threat of
protectionism, vulnerabilities in emerging markets and financial
market volatility.
The monetary analysis shows that broad money (M3) growth
decreased to 3.7% in November 2018, after 3.9% in October. M3
growth continues to be backed by bank credit creation. The
narrow monetary aggregate M1 remained the main contributor to
broad money growth. The annual growth rate of loans to non-
financial corporations stood at 4.0% in November 2018, after
3.9% in October, while the annual growth rate of loans to
households remained broadly unchanged at 3.3%. The euro area
bank lending survey for the fourth quarter of 2018 suggests that
overall bank lending conditions remained favourable, following
an extended period of net easing, and demand for bank credit
continued to rise, thereby underpinning loan growth.
The outcome of the economic analysis and the signals coming
from the monetary analysis confirmed that an ample degree of
monetary accommodation is still necessary for the continued
sustained convergence of inflation to levels that are below, but
close to, 2% over the medium term.
Based on this assessment, the Governing Council decided to
keep the key ECB interest rates unchanged and continues to
expect them to remain at their present levels at least through
the summer of 2019, and in any case for as long as necessary to
ensure the continued sustained convergence of inflation to
levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, the
Governing Council confirmed that the Eurosystem will continue to
reinvest, in full, the principal payments from maturing
securities purchased under the asset purchase programme for an
extended period of time past the date when the Governing Council
starts raising the key ECB interest rates, and in any case for
as long as necessary to maintain favourable liquidity conditions
and an ample degree of monetary accommodation.


SOURCE: European Central Bank ECB

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