Ample monetary stimulus is creating space for structural reforms

One silver lining is that the different areas of economic policy, such as monetary policy and fiscal policy, have operated well together during the crisis and even in synergy. The adverse effects of the coronavirus pandemic on the economy have also been mitigated by a variety of supervisory and macroprudential measures. Global financial institutions have answered the call for the unprecedented amount of emergency funding needed in advanced and emerging economies.

Monetary policy in the euro area has supported economic recovery substantially and safeguarded medium-term price stability. In the current environment of heighted uncertainty, the Governing Council of the ECB carefully assessed incoming economic information at its meeting in September 2020. ‘Ample monetary stimulus is needed to support the economy and employment and to achieve the price stability objective’, stressed Bank of Finland Governor Olli Rehn. Asset purchases will continue under the Eurosystem's monetary policy purchase programmes. Furthermore, the Eurosystem will continue to provide ample liquidity via its targeted longer-term refinancing operations, to facilitate bank lending to households and firms.

‘The ECB’s very accommodative monetary policy stance has opened up space for other economic policies. It is important that this space is put to effective use for investment and reforms throughout the euro area, including Finland’, stated Governor Rehn. With the substantial rise of public sector debt in the euro area, the need for structural reforms in labour and product markets and growth-friendly investments is only more pressing.

The ECB has restarted its review of its monetary policy framework, after being postponed in the spring by six months due to the coronavirus pandemic. Changes in economic fundamentals in the past decades have reduced the leeway to cut rates and dampened inflationary pressures. Among others, these include a change in the dynamic between economic slack and inflation, the decline in the long-term equilibrium real interest rate, and central bank policy rates settling near the so-called effective zero lower bound.

‘Reviewing the ECB's monetary policy framework is more necessary than ever before, not only because of sustained low inflation but also because of the damage wrought by the coronavirus pandemic’, stated Governor Rehn. It is the task of the ECB, without prejudice to price stability, to strive to support the other economic objectives of the union with greater effect, so that the economy may recover and its long-term growth prospects improve.

• Presentation 17 September 2020, Governor Olli Rehn
• Presentation 17 September 2020, Hanna Freystätter, The Head of the Monetary Policy and International Economy division
• Euro & talous publication website