Luxembourg Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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Economic momentum in the euro area has softened since early 2018, owing largely to growing global headwinds. Weaker international trade combined with prolonged uncertainty related to geopolitical tensions, trade disputes and vulnerabilities in emerging markets weighed on economic sentiment. Nevertheless, the economy proved rather resilient, underpinned by robust activity in the service and construction sectors, ensuring a steady pace of job creation and wage growth.

The economic expansion is set to continue, buttressed by favourable central bank financing conditions, a mildly supportive euro area fiscal policy, continued growth in global demand, improving labour market conditions and rising wages. However, downside risks remain, notably due to the uncertain external environment.

Inflation has remained muted and indicators of inflation expectations have declined. The expected weakening in global oil prices should slightly lower headline inflation in the short term. Looking further ahead, underlying price pressures should pick up in the medium term, buoyed by the Eurosystem's monetary policy stance, the ongoing economic performance and wage growth.

Against this background, at its July 25 2019 meeting, the Governing Council of the European Central Bank (ECB) took a number of decisions to ensure that inflation remain on a sustained path towards the price stability objective: below, but close to, 2% over the medium term.

First, the Governing Council (GC) announced that it would keep the interest rates on the main refinancing operations, marginal lending facility and deposit facility unchanged at 0%, 0.25% and -0.4%, respectively. The GC also indicated that it expected key interest rates to stay at their current or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation towards the price stability objective over the medium term.

Second, despite the end of net purchases under the asset purchase programme (APP) in December 2018, the GC decided that the Eurosystem would continue reinvesting, in full, the principal payments from maturing securities bought under the APP. These reinvestments will continue over an extended period past the date when the GC starts to raise key interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

Third, the GC announced its readiness to adjust all of its monetary policy instruments, as appropriate, to support the convergence of inflation towards the price stability objective.

These decisions were taken in addition to the forthcoming third round of targeted longer-term refinancing operations (TLTRO III) announced in March 2019. Details of these operations were provided following the June 2019 GC meeting. Targeted longer-term refinancing operations will help safeguard favourable bank lending conditions and support access to funding, in particular for SMEs.

Taken together, these monetary policy measures underline the GC's view that a highly accommodative monetary policy stance will be needed for an extended period to ensure that inflation moves towards the price stability objective in a sustained manner. At the institutional level, measures to complete the Banking Union and realise a Capital Markets Union remain a priority.