Excerpts from the introductory speech by Mario Draghi, President of the ECB, at the ECB Forum on Central Banking, Sintra, 27 June 2017:
Now, we can be confident that our policy is working and that those risks have abated. The threat of deflation is gone and reflationary forces are at play. And since one of the drivers of inflation today is positive supply developments, this should feed back positively into potential output rather than produce hysteresis. In these conditions, we can be more assured about the return of inflation to our objective than we were a few years ago.
This more favourable balance of risks has been already reflected in our monetary policy stance, via the adjustments we have made to our forward guidance.
Another considerable change from three years ago is the clarification of the political outlook in the euro area. For years, the euro area has lived under a cloud of uncertainty about whether the necessary reforms would be implemented at both the domestic and Union levels. This acted as a brake on confidence and investment, which is tantamount to an implicit tightening of economic conditions. Today, things have changed. Political winds are becoming tailwinds. There is newfound confidence in the reform process, and newfound support for European cohesion, which could help unleash pent-up demand and investment.
Nevertheless, we are still in a situation of continuing slack, and where a long period of subpar inflation translates into a slower return of inflation to our objective. Inflation dynamics are not yet durable and self-sustaining. So our monetary policy needs to be persist.
This is why the Governing Council has repeatedly emphasised that a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up, and to support headline inflation in the medium term. This is reflected in our forward guidance on net asset purchases and interest rates, as well as our decision to reinvest the principal payments received under the APP for as long as necessary.
With reflationary dynamics slowly taking hold, we now need to ensure that overall financing conditions continue to support that reflationary process, until they are more durable and self-sustaining.
As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.
But there is an important caveat that we need to consider. Financing conditions are not only determined by the calibration of central bank instruments, but also by other market prices, some of which are significantly affected by global developments.
In the past, especially in times of global uncertainty, volatility in financial market prices has at times caused an unwarranted tightening of financial conditions, which has necessitated a monetary policy response.
So in the current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery. Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure.