The information that has become available since the Governing Council's last meeting of the year 2017 confirms a robust pace of economic expansion, which accelerated more than expected in the second half of 2017[1].The strong cyclical momentum, the ongoing reduction of economic slack and increasing capacity utilisation strengthened further the Governing Council's confidence that inflation will converge towards its inflation aim of below, but close to, 2%. The risks surrounding the euro area growth outlook are broadly balanced. On the one hand, the prevailing strong cyclical momentum could lead to further positive growth surprises in the near term. On the other hand, downside risks continue to relate primarily to global factors, including developments in foreign exchange markets.
The global economy is continuing to expand at a solid rate, with increasing signs of synchronisation. Activity is benefiting from favourable global financial conditions and strong sentiment. Rising oil prices have contributed to increasing global inflation, but inflation excluding food and energy prices has remained more stable.
Amid this improved economic sentiment, euro area yields and equities have risen since the Governing Council's meeting in December. In foreign exchange markets, the euro appreciated overall in trade-weighted terms, in particular against the US dollar. This recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.
The economic analysis based on the latest economic data and survey results indicates continued strong and broad-based growth momentum at the turn of the year. Private consumption is supported by rising employment, which is also benefiting from past labour market reforms, and by growing household wealth. Business investment continues to strengthen on the back of very favourable financing conditions, rising corporate profitability and solid demand. Housing investment has improved further over recent quarters. In addition, the broad-based global expansion is providing impetus to euro area exports.
Euro area annual HICP inflation was 1.4% in December 2017, down from 1.5% in November, mainly reflecting developments in energy prices. Looking ahead, on the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around current levels in the coming months. Measures of underlying inflation remain subdued - in part owing to special factors - and have yet to show convincing signs of a sustained upward trend. Looking forward, they are expected to rise 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 confirms that broad money growth continued to expand at the robust pace generally witnessed since mid-2015. The recovery in loan growth to the private sector also continued. The euro area bank lending survey for the fourth quarter of 2017 shows that loan growth was still supported by increasing loan demand and the easing of credit standards for loans, in particular to households. Moreover, financing costs for euro area non-financial corporations (NFCs) have remained favourable, with bank lending rates for NFCs being close to their historical lows.
Considering the outcome of the economic analysis with the signals coming from the monetary analysis, the Governing Council confirmed the need for an ample degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2%. While the Governing Council's confidence that inflation will converge towards its inflation aim has strengthened, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. Therefore, an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments 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 for an extended period of time, and well past the horizon of the net asset purchases. Regarding non-standard monetary policy measures, the Governing Council confirmed that the net asset purchases, at the new monthly pace of €30 billion in place since January, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. Moreover, the Governing Council reconfirmed that if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme in terms of size and/or duration. Finally, the Governing Council reiterated that the Eurosystem will reinvest the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary.
[1] Taking into account information available at the time of the Governing Council meeting of 25 January 2018.
