We have set out three conditions that must be in place
for our net asset purchases to end. We need to see the
convergence of inflation towards our aim over the medium term;
we need to have sufficient confidence that this convergence
will be realised; and the inflation path needs to show
resilience and be self-sustaining without additional net
Assessing these conditions is a forward-looking exercise,
because the full effects of monetary policy are felt only after
long lags. We have to rely on our projections, the probability
distributions surrounding them, and the extent to which they
are dependent on our own monetary policy actions.
In terms of convergence, the latest projections see headline
inflation reaching 1.7% in each of the next three years.
Inflation excluding food and energy – a simple measure
of underlying price pressures – is expected to climb
to even higher levels over the same horizon. These are the
latest in a series of projections which foresee inflation
converging to our aim over a policy-relevant medium-term
horizon. Importantly, over the course of the past year, that
convergence path has held firm, and the timing of when we
expect to attain our objective does not appear to have receded
further into the future.
Our confidence in the inflation path is also rising, on the
basis of two indicators we have been using to assess the
probability of inflation convergence.
The first is our own internal estimates of the distribution
of future inflation outcomes. ECB staff have constructed a
measure that combines the implied inflation distributions from
a variety of sources – Eurosystem staff projections,
model-based estimates, market-based measures of expectations
and surveys such as the SPF. These sources are then weighted by
their historical ability to accurately forecast inflation.
That aggregate probability distribution of two-year-ahead
inflation expectations has evolved in three dimensions that
provide confidence that inflation adjustment is sustainable.
The mean of the distribution has increased, the dispersion of
the distribution has narrowed, and the downward skew has
Second, we have been monitoring a range of measures of
underlying inflation, including model-based statistical
measures such as what we refer to as the persistent and common
component of inflation (PCCI) and exclusion-based methods such
as inflation excluding food and energy.
Measures of underlying inflation typically provide some
early information about the rate at which inflation will
stabilise in the future, once all the noise that is affecting
current observed headline measures has faded away. Though
underlying inflation has not yet shown a clear upward trend,
the improvement in wage growth, domestic producer prices and
inflation expectations gives us more confidence that, as
resource utilisation continues to tighten, underlying inflation
will eventually begin to rise.
Finally, market pricing provides some comfort on the
resilience of inflation to the anticipated gradual ending of
This is an excerpt from the Monetary policy in the euro
area speech given by Mario Draghi, President of the ECB, at the
ECB Forum on Central Banking, Sintra, June 19 2018. The full
speech can be freely accessed at www.ecb.europa.eu.