The information that has become available since the Governing Council's monetary policy meeting on 14 June indicates that the euro area economy is proceeding along a solid and broad-based growth path.1 Uncertainties related to global factors, notably the threat of protectionism, remain prominent, and the risk of persistent heightened financial market volatility continues to warrant monitoring. However, the risks surrounding the euro area growth outlook can still be assessed as broadly balanced. The underlying strength of the economy has confirmed the Governing Council's confidence that the sustained convergence of inflation to its aim will continue in the period ahead and will be maintained even after a gradual winding-down of the net asset purchases. Nevertheless, significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This support will continue to be provided by the net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by the Governing Council's enhanced forward guidance on the key ECB interest rates. In any event, the Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards its aim in a sustained manner.
The growth momentum of the global economy continued to be steady in the second quarter of 2018, but downside risks related to trade tariffs have remained prominent. In addition, global trade indicators recorded a loss in momentum. Financial conditions have tightened somewhat for emerging market economies, but overall remain supportive in advanced economies.
In the euro area, sovereign bond yields have declined since the 14 June meeting, on the back of receding volatility in sovereign debt markets and declining risk-free rates. Equity prices experienced a correction amid increasing trade tensions. In foreign exchange markets, the euro broadly appreciated in trade-weighted terms.
The latest economic indicators have stabilised and continue to point to ongoing solid and broad-based growth, albeit at a slower pace than in 2017. This easing reflects a pull-back from the very high levels of growth last year and is related mainly to weaker impetus from previously very strong external trade, compounded by an increase in uncertainty and some temporary and supply-side factors at both the domestic and the global level. Private consumption continues to be supported by ongoing employment gains, which, in turn, partly reflect past labour market reforms, and by growing household wealth. Business investment is fostered by the favourable financing conditions, rising corporate profitability and solid demand. Housing investment remains robust. In addition, the broad-based expansion in global demand is expected to continue, thus providing impetus to euro area exports.
Euro area annual HICP inflation increased to 2.0% in June, from 1.9% in May, reflecting mainly higher energy and food price inflation. On the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around the current level for the remainder of the year. While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Domestic cost pressures are strengthening and broadening amid high levels of capacity utilisation and tightening labour markets. Uncertainty around the inflation outlook is receding. Looking ahead, underlying inflation is expected to pick up towards the end of the year and thereafter to increase gradually over the medium term, supported by the ECB’s monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth.
The monetary analysis indicates that broad money growth increased again in June 2018, having gradually decelerated since it last peaked in September 2017. The recovery in the growth of loans to the private sector is proceeding, driven mainly by loans to non-financial corporations (NFCs). The euro area bank lending survey for the second quarter of 2018 suggests that loan growth continued to be supported by easing credit standards and increasing demand across all loan categories. Net issuance of debt securities by euro area NFCs is estimated to have increased further, while financing costs for NFCs have remained favourable.
On the basis of the outcome of the economic analysis and the signals coming from the monetary analysis, the Governing Council 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.
Accordingly, 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 make net purchases under the asset purchase programme (APP) at the current monthly pace of €30 billion until the end of September 2018. The Governing Council anticipates that, after September, subject to incoming data confirming its medium-term inflation outlook, it will reduce the monthly pace of the net asset purchases to €15 billion until the end of December 2018 and then end net purchases. Furthermore, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
