Vue d'ensembe (EN Version)

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

The Governing Council of the European Central Bank (ECB) has communicated a series of monetary policy measures taken at its meeting on 13 December 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 present levels through the summer of 2019 and, in any case, for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

Regarding non-standard monetary policy measures, the Governing Council confirmed the end of net purchases under the asset purchase programme (APP) at the end of December 2018. It also announced that it intended to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

According to its assessment, the underlying strength of domestic demand continues to underpin the euro area expansion and the gradual rise in inflationary pressures, although incoming information has been weaker than expected. The Governing Council continues to be confident that the sustained convergence of inflation to the Eurosystem objective will proceed in the coming period, with such convergence expected to continue even after the end of net asset purchases. However, significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This support will continue to be provided by the reinvestments of the sizeable stock of acquired assets, as well as by the forward guidance on the key interest rates. In any event, the Governing Council has expressed its readiness to adjust all of its instruments to ensure that inflation continues to move towards its inflation aim in a sustained manner.

With regard to the latest data, real GDP in the euro area increased by 0.2%, quarter on quarter, in the third quarter of 2018, after growth of 0.4% in the two previous quarters. Data and results from the most recent surveys have been weaker than expected, reflecting a diminishing contribution of external demand and some factors specific to a few countries and sectors. Although some of these factors are likely to unwind, these developments nevertheless point to a slight slowdown in future growth. According to the December 2018 Eurosystem staff macroeconomic projections for the euro area, real annual GDP growth is expected to be 1.9% in 2018, 1.7% in 2019 and 2020 and 1.5% in 2021. Compared to the September 2018 macroeconomic projections, the outlook for real GDP growth has been slightly revised downwards for 2018 and 2019.

In the Governing Council's view, while the risks to the euro area's growth prospects can still be considered broadly balanced, the balance of risks is moving to the downside, owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility. It was this same persistence of uncertainties related to these factors that motivated the Governing Council at its recent meeting on 24 January to revise downwards the balance of risks affecting the growth prospects in the euro area.

The annual increase in the Harmonised Index of Consumer Prices (HICP) in the euro area slowed to 1.9% in November 2018, from 2.2% in October, mainly reflecting lower energy prices. On the basis of current oil futures prices, headline inflation is expected to decline in the coming months. Measures of underlying inflation remain generally muted, but are expected to strengthen in the medium term, supported by monetary policy measures, ongoing economic growth and accelerating wage growth. According to macroeconomic projections of December 2018, HICP inflation is expected to rise by 1.8% in 2018, 1.6% in 2019, 1.7% in 2020 and 1.8% in 2021. Compared with the September 2018 macroeconomic projections, the outlook for HICP inflation has been revised slightly upwards for 2018 and downwards for 2019.

Economic and financial situation in Luxembourg

In Luxembourg, according to the national accounts estimates of October 2018, real GDP growth for 2017 was 1.5%, after 2.4% growth the previous year. The estimate of real GDP growth has thus been revised downwards by 0.8 p.p. for 2017 and by 0.5 p.p. on average over the period 2014-2017. This level of growth in 2017 falls short of the expectations of all international and national organisations and also seems surprising in view of other indicators that suggested more favourable developments in the Luxembourg economy. These low growth rates are believed to be due to one-off but significant operations by a few multinational companies. Given the provisional nature of these data, caution is required in interpreting the national accounts, which may be subject to revision in subsequent publications.

During 2018, cyclical developments remained favourable. The good health of the labour market as a whole, resilient, although slower growth in the euro area and continued high confidence among business leaders in the manufacturing sector suggest that activity in all sectors of the economy is on the rise.

The BCL projections of December 2018 are fairly close to those of June 2018, but have been adapted to take into account recent developments in the European and international environment. These projections anticipate real GDP growth in 2018 around 3.6%, a level close to the historical average, but apparently faster than the provisional GDP growth estimate for 2017. For the following years, the Luxembourg economy could evolve at a similar pace and reach levels close to 3.4% in the context of slower global growth and a smaller impetus from the stock market. 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. However, these positive effects could be  smaller following the shift to a downside balance of risks to growth in the euro area. Overall, we can expect growth in Luxembourg to remain higher than in the euro zone and above Luxembourg's post-crisis average.

Annual inflation in the national consumer price index slowed after the first quarter of 2018 and then accelerated, reaching 2.3% in November 2018. However, on average, over the first eleven months of 2018, the inflation rate was 1.4%, down from 1.7% in 2017. This decline in inflation was largely due to a government measure changing the modalities by which childcare costs are reimbursed.

According to the BCL projections, inflation should be 1.5% in 2018 and 1.8% over the following three years. Compared to 2018, inflation is expected to strengthen further in the coming months before slowing towards mid-2019. This scenario assumes a weaker contribution of energy prices in the context of the observed decline in oil prices. Core inflation is expected to accelerate sharply in 2019, supported by the payment of the index tranche in August 2018 and the end of the negative base effect associated with the above-mentioned government measure. Core inflation for the rest of the projection horizon remains close to the historical average in a context of economic growth, employment growth, falling unemployment, sustained wage increases and inflation imported from neighbouring countries. Compared to the June 2018 projections, inflation has been revised slightly upwards for 2018 and has remained unchanged for 2019 and 2020. Based on these forecasts, the next index tranche is expected to be paid in the fourth quarter of 2019. The following index tranche would be due for the second quarter of 2021.

As regards public finances, the general government balance in Luxembourg, published in early October 2018 as part of the excessive deficit notification, recorded a surplus for 2017 of 1.4% of GDP. According to BCL projections, this surplus is expected to gradually decline to 1.0% in 2020 before recovering to 1.2% in 2021. Apart from the usual macroeconomic risks, these projections are surrounded by two major uncertainties. On the one hand, prolonged recourse to tax arrears, as was observed in 2017, is not included in the baseline scenario. If this materialises, the central government (and general government) balance could be better than anticipated. On the other hand, these projections were prepared according to an "unchanged fiscal policy scenario" for the entire projection horizon. They will be updated to take account of the measures, on both revenue and expenditure sides, which the new government will incorporate in its 2019 budget proposal, which is expected early in 2019.

Finally, this bulletin includes five boxes dedicated to specific topics. A first box presents the results of a survey of EU companies on their relocation and outsourcing of productive activities and their wage and employment decisions. The second box sheds light on the hedge fund industry in Luxembourg, its regulatory framework, available statistics and main investment strategies. A third box analyses inflation perceptions and expectations by resident households as reported in the monthly consumer survey. A fourth box discusses the contribution of real estate assets other than the main residence in the gross wealth of resident households. The underlying data come from the BCL household finance and consumption survey conducted among Luxembourg residents. Finally, a fifth box analyses recent revisions to national accounts data.

Bulletin 2018/3