- only the French version is binding -

Monetary policy decisions and the economic and financial situation in the euro area

The ECB Governing Council took a series of monetary policy measures at its meeting on 14 June 2018.

First, it decided that the interest rates on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects these key interest rates to remain at their current levels at least through the summer of 2019 and, in any case, for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.

With regard to unconventional monetary policy measures, the Governing Council confirmed the continuation of net purchases under the asset purchase programme (APP) at the current monthly pace of EUR 30 billion until the end of September 2018.

It anticipates that, if incoming data confirm its medium-term inflation outlook, the monthly pace of net asset purchases will then be reduced, to EUR 15 billion, until the end of December 2018, and that net purchases will then come to an end.

The Governing Council also intends to continue its policy of reinvesting principal repayments on maturing securities acquired under the APP. This reinvestment policy will be pursued for an extended period after the end of net asset purchases and, in any case, for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.

In the Governing Council’s assessment, all these monetary policy decisions preserve the current ample degree of monetary accommodation necessary to further strengthen domestic price pressures and headline inflation. This support will continue to be provided by net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by Governing Council’s enhanced forward guidance on key ECB interest rates. In any event, the Governing Council also expressed its readiness to adjust all of its instruments, should the need arise, to ensure that inflation continues to move towards its target in a sustainable manner.

The Governing Council took these decisions following an assessment of inflation convergence towards its objective and concluded that substantial progress had been made. With long-term inflation expectations firmly anchored, the underlying strength of the euro area economy and the maintenance of an ample degree of monetary accommodation provide grounds to be confident that the sustained convergence of inflation to levels below, but close to, 2% in the medium term, will continue in the period ahead and will be maintained even after a gradual winding-down of net asset purchases.

This assessment and these monetary policy decisions are based in particular on the following elements. Euro area real GDP growth quarter-on-quarter slowed to 0.4% in the first quarter of 2018, after 0.7% in previous quarters. This growth rate is weaker, as are the latest economic indicators, in particular those from business and consumer surveys, but remains consistent with continuing solid and broad-based economic growth. According to the June 2018 Eurosystem staff macroeconomic projections for the euro area, annual real GDP growth is projected to be 2.1% in 2018, 1.9% in 2019 and 1.7% in 2020. Compared with the March 2018 macroeconomic projections, the outlook for real GDP growth has been revised down for 2018 and remains unchanged for 2019 and 2020. According to the Governing Council, risks surrounding the euro area growth outlook remain broadly balanced, although global uncertainties, including the threat of increased protectionism, have become more prominent.

Annual inflation in the euro area harmonized index of consumer prices (HICP) increased to 1.9% in May 2018, from 1.2% in April. Inflation rates are expected to fluctuate around their current level until the end of the year. While measures of underlying inflation remain generally muted, they have been increasing from past lows. Looking ahead, underlying inflation is expected to pick up towards the end of this year and then gradually increase, supported by monetary policy measures. According to the June 2018 macroeconomic projections, HICP inflation is expected to rise by 1.7% in 2018, 2019 and 2020. Compared with the March 2018 macroeconomic projections, HICP inflation prospects have been significantly revised upwards for 2018 and 2019, mainly as a result of higher oil prices.

Economic and financial situation in Luxembourg

In Luxembourg, according to the April 2018 national accounts estimate, real GDP growth for 2017 was 2.3%, after an increase of 3.1% the previous year. This level of growth is below the expectations of all international and national organizations and would be close to that of the euro area, whereas in general growth in Luxembourg regularly and largely exceeds that of the euro area. The relatively low growth rate for 2017 also seems surprising in the light of developments in other indicators which suggested more favorable developments in the Luxembourg economy. Given the provisional nature of these data, caution is required in interpreting the national accounts, which may be subject to revision in subsequent publications.

At the beginning of 2018, cyclical developments remained favorable. The soundness of the labor market as a whole, robust growth in the euro area and continued high confidence among business leaders in the manufacturing sector suggest an increase in activity in all sectors of the economy.

The June 2018 BCL projections essentially confirm those of December 2017 and indicate real GDP growth in 2018 around 3.9%, i.e. a growth rate close to the historical average, but apparently higher than the first estimate of GDP in 2017. For 2019, growth in the Luxembourg economy could slow to levels close to 3.6% in the context of a stabilization in global growth and a smaller impetus from the stock markets. However, given the technical assumptions and the expected expansion in the euro area, positive effects on growth in Luxembourg are also expected over the projection period. This explains the continuation of robust growth, outpacing growth in the euro area and post-crisis growth in Luxembourg. 

The annual rate of change in the national consumer price index has slowed since mid-2017 and averaged 1.1% over the first five months of the current year. This decline in inflation has largely been due to a lower contribution from energy prices and to a government measure that has changed the reimbursement modalities of day care fees.

The BCL projects inflation to be 1.4% in 2018 and 1.8% in 2019. Price dynamics are expected to reverse in the coming months and the inflation rate is expected to accelerate. This scenario is based on a stronger contribution from energy prices in the context of the observed rebound in oil prices. Underlying inflation would move closer to its historical path due to favorable economic conditions, higher wages and higher imported inflation. Compared to December 2017, the inflation projections have changed little for 2018 and 2019.

Finally, this bulletin includes two boxes dedicated to specific topics. The first box presents a study of households' aversion to financial risks, while the second box presents estimates of potential growth and the output gap in Luxembourg.