Monetary policy supporting sustainable economic recovery and a brighter outlook for inflation

The global economy will recover from the COVID-19 pandemic, bolstered by increasing vaccination coverage and support from economic policy. The steep contraction will give way to growth of 6% this year. ‘Euro area growth is robust, but it still needs support from economic policy. The outlook is overshadowed by production bottlenecks, the possibility of new virus variants as well as low vaccination rate in the developing world,’ notes Bank of Finland Governor Olli Rehn.

Strong monetary and fiscal policy measures have reduced the longer-term economic scars in many countries. Monetary policy has helped maintain favourable financing conditions, while central bank balance sheets have expanded. Favourable financing conditions and public support measures have facilitated business and household access to credit. Growth in general government debt will thus be more marked than during crises on average.

Inflation was subdued during the early phase of the COVID crisis. In the present year, euro area inflation has been fuelled by the low level of prices in the reference period, the rise in commodity prices and production bottlenecks. These factors are estimated to push up inflation temporarily. In the medium term, euro area inflation will be dampened by economic slack and moderate wage pressures. ‘The task of monetary policy is to maintain favourable financing conditions for a sufficiently long period for the economy to continue its recovery and to offset the negative impact of the pandemic on inflation,’ stresses Governor Rehn.

In line with the ECB’s new monetary policy strategy, price stability is best maintained by aiming symmetrically for 2% inflation over the medium term. Negative and positive deviations from this target are considered as equally undesirable. ‘The new monetary policy strategy contributes to a more solid anchoring of inflation expectations at the target level and helps to ensure that negative deviations from the inflation target do not become entrenched,’ emphasises Governor Rehn.

In line with the new strategy, the monetary policy stance remains strongly accommodative. In its meeting on 9 September 2021, the Governing Council of the ECB confirmed its monetary policy measures. The Governing Council did, however, judge that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP).

Both fiscal and monetary policy are providing a stimulus to the euro area economy. Strong public measures have been justified to mitigate the effects of the pandemic. At the same time, the high debt ratios in euro area countries weaken the conditions for sustainable economic developments. ‘Even though a rise in interest rates is not yet within sight, it will nevertheless one day take place. This should be taken into account in budgetary planning in all the euro area countries,’ notes Governor Olli Rehn.

• Presentation 16 September 2021, Governor Olli Rehn (in Finnish)
• Presentation 16 September 2021, The Head of the Monetary Policy and International Economy division Hanna Freystätter (in Finnish)
• Interim forecast for the Finnish economy (in Finnish)
• Euro & talous -publication website