2016 was in many ways a difficult year, but it was also marked by signs of progress. Though the year began shrouded in economic uncertainty, it ended with the economy on its firmest footing since the crisis.
Yet as economic uncertainty subsided, political uncertainty increased. We faced a series of geopolitical events that will shape our policy landscape for years to come. This year’s Annual Report describes how the ECB navigated these choppy waters.
2016 opened amid fears of a renewed global slowdown, reflected in pronounced financial market volatility. There was a danger that the return of inflation to our objective would be further delayed and – with inflation already very low – deflation risks were material. Just as in 2015, the Governing Council remained determined to use all the tools within its mandate to fulfil its objective.
So in March, we introduced a series of new measures to expand our monetary stimulus, including lowering our key policy rates further, increasing the asset purchase programme from €60 billion to €80 billion a month, purchasing corporate bonds for the first time, and launching new targeted longer-term refinancing operations.
As we describe in the Report, these measures proved very effective in easing financing conditions, sustaining the recovery and – eventually – supporting a gradual adjustment of inflation rates towards levels closer to our objective.
With our policy working, in December the asset purchase programme was extended by nine months to ensure longer support to financing conditions and a sustained return of inflation towards, but below, 2%. The volume of purchases was, however, reset to its original level of €60 billion per month. This reflected the success of our actions earlier in the year: growing confidence in the euro area economy and disappearing deflation risks.
Yet alongside these benefits, monetary policy has side-effects – it always does. In 2016 those side-effects were frequently in the spotlight. In this year’s Report we address some of the questions and concerns about the unintended consequences of our actions.
One is about their distributional effects, especially in terms of inequality. We show that, over the medium term, monetary policy has positive distributional effects by reducing unemployment, which benefits poorer households the most. After all, bringing people into a job is one of the most powerful drivers of lower inequality.
Another concern is about the profitability of banks, insurers and pension funds. We discuss how financial institutions have been affected by, and responded to, the low interest rate environment. We show that the ability of banks to adapt depends on their specific business models.
The Report covers other challenges for the financial sector in 2016. We look in particular at the problem of non-performing loans, what needs to be done to tackle it, and the obstacles which remain. We also have a special feature on new technology and innovation in the sector, how it might affect the structure and functioning of the sector, and what this means for overseers and regulators.
And no review of 2016 could be complete without considering the seismic political changes of the year, not least the decision of the United Kingdom to exit the European Union. Accordingly, the Report assesses Brexit from an ECB perspective. Above all, we emphasise the importance of preserving the integrity of the Single Market and the homogeneity of its rules and their enforcement.
Political uncertainty is likely to persist into 2017. But we remain confident that the economic recovery, buoyed by our monetary policy, will continue. The ECB has a clear mandate for its actions: to maintain price stability. This guided us successfully through 2016 – and it will continue to do so in the year to come.
