Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. Regarding non-standard monetary policy measures, we confirm that our net asset purchases, at the current monthly pace of $ 60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme.
Our monetary policy measures have continued to preserve the very favourable financing conditions that are necessary to secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term. The information that has become available since our last monetary policy meeting in late April confirms a stronger momentum in the euro area economy, which is projected to expand at a somewhat faster pace than previously expected. We consider that the risks to the growth outlook are now broadly balanced.
At the same time, the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.6%, quarter on quarter, in the first quarter of 2017, after 0.5% in the last quarter of 2016. Incoming data, notably survey results, continue to point to solid, broad-based growth in the period ahead. The pass-through of our monetary policy measures has facilitated the deleveraging process and should continue to support domestic demand. In particular, the recovery in investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Employment gains, which are also benefiting from past labour market reforms, are supporting real disposable income and private consumption. Moreover, the global recovery is increasingly supporting trade and euro area exports. However, economic growth prospects continue to be dampened by a sluggish pace of implementation of structural reforms, in particular in product markets, and by remaining balance sheet adjustment needs in a number of sectors, notwithstanding ongoing improvements.
This assessment is broadly reflected in the June 2017 Eurosystem staff macroeconomic projections for the euro area, finalised in late May, which are conditional on the full implementation of all our monetary policy measures. These projections foresee annual real GDP increasing by 1.9% in 2017, by 1.8% in 2018 and by 1.7% in 2019. Compared with the March 2017 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised upwards over the projection horizon.
The risks surrounding the euro area growth outlook are considered to be broadly balanced. On the one hand, the current positive cyclical momentum increases the chances of a stronger than expected economic upswing. On the other hand, downside risks relating to predominantly global factors continue to exist.
According to Eurostat 's flash estimate, euro area annual HICP inflation was 1.4% in May, following 1.9% in April and 1.5% in March. As expected, the recent volatility in inflation rates was mainly due to energy prices and temporary increases in services prices over the Easter period. Looking ahead, on the basis of current futures prices for oil, headline inflation is likely to remain around current levels in the coming months. At the same time, measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as unutilised resources are still weighing on domestic price and wage formation. Underlying inflation is expected to rise only gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion and the corresponding gradual absorption of economic slack.
This assessment is also broadly reflected in the June 2017 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.5% in 2017, 1.3% in 2018 and 1.6% in 2019. By comparison with the March 2017 ECB staff macroeconomic projections, the outlook for headline HICP inflation has been revised downwards, mainly reflecting lower oil prices.
Turning to the monetary analysis, broad money -LRB- M3 -RRB- continues to expand at a robust pace, with an annual rate of growth of 4.9% in April 2017, after 5.3% in March. As in previous months, annual growth in M3 was mainly supported by its most liquid components, with the narrow monetary aggregate M1 expanding at an annual rate of 9.2% in April 2017, after 9.1% in March.
The recovery in loan growth to the private sector observed since the beginning of 2014 is proceeding. The annual growth rate of loans to non-financial corporations increased to 2.4% in April 2017, from 2.3% in the previous month, while the annual growth rate of loans to households remained stable at 2.4% in April. The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing, notably for small and medium-sized enterprises, and, hence, credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for a continued very substantial degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2%.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively to strengthening economic growth. The implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost productivity and potential output growth. Regarding fiscal policies, all countries would benefit from intensifying efforts towards achieving a more growth-friendly composition of public finances. A full, transparent and consistent implementation of the Stability and Growth Pact and of the macroeconomic imbalances procedure over time and across countries remains essential to bolster the resilience of the euro area economy.
Question: I have two questions. Regarding the two big changes in the communication today, has that been decided on a unanimous basis, so everybody was behind that?
Question: On the forecast, if you 're saying that inflation is around 1.6% for 2019, how much has QE factored in that inflation forecast? Because you 're saying the asset purchase programme might end this year, might also go further into next year, but how much of such an effect is still in that forecast for 2019 and 2018?
Draghi: On the first question, we did n't have a vote, so I ca n't really say unanimity. But basically I did n't hear any dissenting voice by any Governing Council member with respect to the proposals that have been just stated in the introductory statement.
Draghi: The other thing -- basically, we 've defined our objective: our objective is a self-sustained, durable convergence towards an inflation rate which is below, but close to, 2%. This convergence is predicated on the very substantial amount of monetary accommodation that I 've just mentioned in the introductory statement, and it 's predicated on that. That 's what it is in the projections and that 's what it is in our programme.
Question: My question is regarding Banco Popular. Did the ECB act quickly enough over Banco Popular, given how close it came to being insolvent? And are you reviewing the case now, given the bank was deemed solvent less than a year ago?
Draghi: As you know, we have a separation principle, and we never comment on individual institutions. What I can say, as far as we are concerned, we can only express appreciation for the timely action of the SSM. If the Vice-President wants to have any comment on that I will give him the floor, but otherwise we do n't comment on individual institutions, and as you know, we have the separation principle.
Constâncio: Yes, of course because it was a decision of the ECB that was at stake. That decision was based on the BRRD, and the reasons that triggered that decision were related to the liquidity problems. There was a bank run. So it was not a matter of assessing the developments of the solvency as such, but the liquidity issue. It is stated in Article 32, number 4, item C, that the fact that an institution is unable, or there are sufficient objective facts that show that it is about to become unable, to satisfy its debts and liabilities, that 's a reason for the declaration of an institution being failing or likely to fail. That 's enough. And then after that declaration, the process was given to the Single Resolution Mechanism that then is in charge of resolution. So our role as ECB was just the declaration that the bank, for liquidity reasons, was failing or likely to fail.
Question: A lot of people are going to take the tweaking to the forward guidance as a sign that a decision on tapering will come in September. Would market participants and ECB watchers be right to think that, that we will get a decision on tapering or what happens to QE in 2018 in September?
Question: And my second question: one of the heads of the national central banks has raised doubts about whether the European Central Bank can hit its inflation target. We 've seen today downgrades to the inflation projections, but at the same time you have removed the commitment to lower rates. Given that, should markets share the same doubts as Mr Nowotny, that you perhaps ca n't hit your inflation target?
Draghi: On the first question, it was not discussed.
Draghi: On the second question, you 're actually asking me many questions. First of all, the downward revisions in inflation: as a matter of fact, very little has changed as far as inflation is concerned, because it was 1.9% in April, if I remember, and we all remember the serious concerns, if not the outcries, that inflation was going up too much, and now it 's 1.4%, and it 's mostly -- actually, almost entirely -- driven by the price of oil and price of foods. So from that viewpoint nothing has changed in substantial terms.
Draghi: What needs to be explained, however, is the flat and low profile of the underlying inflation. That needs to be explained, in a sense. That has to do mostly with the subdued nominal wage growth. There are many reasons, and some of them may be more important than others -- it 's hard to say which is which -- but basically the reasons that are behind this are certain structural changes that have taken place, one of which is certainly the backward-looking negotiation of nominal wages, looking as a sort of reference of inflation, looking at low inflation rates as a basis for current negotiations. But there are also other reasons.
Draghi: All this recovery is happening with very strong creation of new jobs, so there is definitely a very significant increase in labour force, labour participation. At the same time, we have evidence that many -- it 's hard to say what is the percentage, but many of these new jobs are so-called" low-quality '' jobs, where we 're talking about temporary employment, we 're talking about part-time employment. There are many ; so much so that the ECB in a recent paper has developed some measures of a broader concept of unemployment which is broader than the official rate. It may well be that this is actually slowing the growth of nominal wages as well.
Draghi: More generally, structural reforms that have taken place are good for growth, certainly, and are good ultimately in the medium/long term for employment, but also, in making the markets more flexible -- especially the labour market more flexible -- do tend to produce a lower growth in nominal wages. So all this makes us think that some changes in the structure of wage negotiations have taken place. So the first thing is, basically, we need to be patient. We need to be patient because we know that the labour market slack is actually tightening, the output gap is closing, and we know all these factors in the end, their effects will fade away. The job quality will improve, productivity will increase when the cyclical recovery goes up.
Draghi: So first of all, we need to be patient. Second is we need to be confident. If we look at the uncertainty dimension of inflation, we see two phenomena. The first is that tail risks have disappeared. So deflation risks are not there any longer, and that 's why we have removed one of our easing biases, which was exactly addressing the tail risks of the inflation path. And we also see that the uncertainty about the path of inflation has also decreased. So as the output gap will close and the unemployment rate will go down, we are becoming also more confident that the inflation path will converge towards our objective in a durable way.
Draghi: Having said that -- and here I come to the other part of your question -- we need to be persistent. We need to continue to accompany the recovery with our monetary policy. We will continue with our purchases, and the introductory statement again is quite clear: it says we confirm our net asset purchases at the current monthly pace of $ 60 billion, and these purchases are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
Draghi: Also, I want to emphasise that basically the ECB will be in the market for a long time, when we say that" the net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme '', and just a little later on we say that" a very substantial degree of monetary accommodation is still needed. ''
Draghi: So the bottom line basically is that the Governing Council trusts the strength and the power of our purchase programme, and that 's it. I think I 've responded to all your questions.
Question: Do you think that a prolonged lower inflation rate forecast could force the ECB to change its forward guidance and raise the negative deposit rates before the end of the quantitative easing?
Draghi: No. Nothing substantial has happened to inflation other than the oil price and the price of food. Everything stayed -- as I think it was well said by Governor Hansson this morning: if we compare inflation now with inflation in December, we see that underlying inflation is basically the same for year after year. At the same time, since we have stronger confidence in the path of inflation convergence and we 've seen that the tail risks of deflation have definitely disappeared, we felt confident in removing the easing bias as far as the interest rate was concerned.
Question: Did you have during this week 's meeting any discussion about policy normalisation, or is this discussion still to be had in the future in the light of the current inflation outlook and of the inflation projections?
Question: My second question is, you have removed the so-called easing bias on rates, but you say you are still ready to increase the size and duration of QE. Under what conditions would you do that? Would a continuation of this inflation outlook warrant an extension or maybe even an increase in volume of QE?
Draghi: You asked me about normalisation: was it being discussed? The answer is no. Of course, there are people who -- one or two Council members observed that we have to think in perspective to the link between the asset purchase programme and the inflation convergence, so there were some few -- two, actually, if I remember, two, I guess -- observations of this nature, but there was n't any discussion like that on normalisation, as you mentioned.
Draghi: The other point was about why we left the other bias, the APP bias, easing bias. Well, first of all, the two are very different. The first is an expectation that interest rates will remain at present or lower levels. Now, if you ask me now," What do you expect? '' If you ask me," But in case things were to worsen, are you ready to lower interest rates? '' So the APP easing bias is like this. It 's part of a reaction function and it does say that if things were to turn less favourable -- and here, just stop a moment: if things were to turn less favourable, it 's a set of contingencies which is more benign than the tail-risk contingency embodied in the expectation on rates, and as such it 's still there. So it 's part of our reaction function. If things turn out to be less favourable we are ready to expand our APP. That 's the answer.
Question: I have a question about Popular. Why did you choose Santander 's bid? Why was Santander the best option?
Draghi: As before, I refer to the Vice-President.
Constâncio: As I said before, after the declaration that the bank was failing or likely to fail, because there was a bank run and a liquidity issue, which is sufficient justification for that declaration, then the matter went to the Single Resolution Mechanism.
Draghi: Single Resolution Board?
Constâncio: Well, the Board is the deciding body of the SRM. The SRM is the mechanism, as the SSM is the mechanism for supervision. So the matter, after the declaration, went to the resolution mechanism, to their board, to take decisions about resolution. So after the declaration of failing or likely to fail we had no interference with the subsequent decisions. They belonged completely to the SRB. Not to the SSM ; not to the ECB. I 'm talking about legal competences, and we have to be very formal in this matter, as you will, I 'm sure, fully understand. Legally our competence was just to declare that the bank was failing or likely to fail for liquidity reasons. All the rest was not legally with us.
Question: I have two questions: one is local and one is more general. Estonia is a country with very low public deficit, low public debt, and we have no government bonds. Estonian politicians are thus complaining that Estonia is in a way missing out from this Central Bank stimulus, QE. How would you respond to such an interpretation of QE?
Question: The second question is about EMU reform. The European Commission has tabled the discussion paper for reform of eurozone, and we are already discussing about eurozone finance ministers and eurozone parliament, et cetera. Once you wrote that we should n't scare or confuse the public with such discussions, but concentrate instead on the critical minimum that is necessary to make the eurozone function better. So how would you define this critical minimum, and what is this critical minimum on a Member State level?
Draghi: As far as the first question is concerned I would defer to Governor Hansson, and then I would just add something at the end, please.
Hansson: I think this is an issue of capital mobility, and we get this question all the time. We use the principle of connected vessels: that this is a common financial market and therefore changes that take place in one particular jurisdiction spill over to the whole eurozone. So while it 's true that we do n't have a lot of direct purchases here, in the end let 's say most of our credits are all linked to Euribor, and Euribor is not set in this country but is set more broadly in the euro area. So the transmission mechanism works, but through different channels. And I think one of the signs might be that right now we have the highest inflation rate in the euro area. So in some sense it 's probably working, but through different channels.
Draghi: I will only add to this that Estonia being such an open economy, it benefits especially from the positive effects that QE has on the rest of the eurozone as well.
Draghi: On your second question, the experience of the last few years shows that the economic and monetary union, with the many benefits that it 's brought to the eurozone, is also fragile. And it 's fragile for various reasons, one of which is that it 's incomplete. And that 's the sort of consideration that is at the basis for the Commission 's recent work. The Commission has published a paper with different scenarios, and before the Commission 's paper we had the Five Presidents ' Report, where there was a blueprint -- we would say a forward guidance -- with two horizons, really. One is shorter-term, where there are certain measures, certain decisions that can be taken, especially as far as completing the banking union is concerned. And then we have medium - or long-term horizons where new changes in the economic and monetary union could be introduced, but they do require a more extensive change in our treaties, in our treaty foundations.
Draghi: So I guess it 's to be welcomed, this new work on strengthening the monetary union, especially having in mind that we need to repair the fragilities that have appeared in the last few years in the union. Then we can discuss what we talk about, but this is a broader discussion, and it 's not finished yet. It 's just the beginning of a broader discussion.
Question: Does what you said about removing the easing bias on rates mean that this was n't a first small step away from stimulus, a first step towards the exit, as it might be interpreted?
Question: The second question is on how constrained the ECB is likely to be on implementing QE next year: do you see any problems? And how flexible could the parameters of the QE be, like the capital key, for instance?
Draghi: On the first question, we removed the interest rate easing bias because the tail risks on the future path of inflation have disappeared. That is to say, deflation risks have definitely gone away. The lower -- the possibility that the DFR, deposit facility rate, could go lower -- was predicated on the strengthening or the materialisation of this tail risk. As I said, does it imply anything as far as the reaction function is concerned? The answer is no. If things were to turn out in a way that these risks were to reappear, we 'd certainly be ready to lower rates. So that 's the explanation.
Draghi: On the second point, the programme is running smoothly and as far as the future is concerned the programme has enough flexibility, and we 'll certainly look at that when the time comes if need be. In the meantime the Governing Council Members reiterated their confidence in the strength of the programme, in the power of the programme, and as you 've seen from the introductory statement they confirmed both the programme and the forward guidance that 's associated with that.
Question: Given the fact that the ECB is exiting very slowly the period of extraordinary measures, do you think that this might be a challenge for some countries that have still a big debt, like Italy, given also that Italy is facing now probably a period of political uncertainty or instability?
Question: The second question goes to the risk -- is there any risk, in your opinion, of a scarcity of German bonds on the markets as you 're going on with the same rhythm?
Draghi: With respect to the second question, I kind of answered an almost similar question a moment ago, namely, the programme is running now smoothly and when and if we face problems we 'll use the flexibility that the programme itself embodies. So that 's the present situation. And as I said, the Governing Council members reiterated their confidence in the strength and the power of the programme as it stands today.
Draghi: The other question, which was the first question: the first thing to remember is we have a mandate. Our mandate is specified in terms of price stability. It 's not specified in government budget support or other considerations. It 's been said that savers are being affected by our programme, banks are being affected by our programme, banks ' profitability is being affected ; now it 's governments ' budgets.
Draghi: Second, there are always countries that anticipate, countries that lag behind. Our programme has in mind price stability and that 's what we have to remember. But certainly, those countries which have a weak budget position and low growth and lack of structural reforms will be, certainly, more affected than others by a possible increase in interest rates. There 's no discovery about that. The key thing here is to resuscitate growth. It 's the most important thing.
Question: On the sum-up sentence of your introductory statement the mention of" undue delay '' was dropped regarding the sustained return of inflation to a level below but close to 2%. Is it just a formal change, or what is the merit of this dropping of" without undue delay ''? That 's the first question.
Draghi: It 's purely formal.
Question: Another, more broad, question: since very much attention has been given to the assessment regarding the risks surrounding economic growth, in the past, until the end of 2014, if I remember, the Governing Council communicated itself also on its view regarding the medium-term outlook for price developments, the risk regarding this medium-term outlook. Is it something the ECB could maybe emphasise? Because this is an aspect -- which are the risks on the medium-term price stability -- which everything depends on. Why has this element of communication disappeared, and is it not now or in the future time to reactivate it?
Draghi: We did n't have a discussion of when and if to reactivate, but certainly it 's a topic which from time to time resurfaces in our discussions. And so it was raised this morning ; it was raised in other meetings in the past. We are reflecting on it. There is no specific reason to have it introduced again, but we are certainly reflecting on it, also for the sake of symmetry with growth and with the growth of output path.
Question: Which conditions should be met before the ECB could stop offering extraordinary monetary policy measures?
Draghi: The answer really is defined in our objective. We have to be confident that the inflation rate is durably converging towards our objective of an inflation rate which is close to but below 2%, and it 's a self-sustained convergence. In other words, it 's durable but it 's also going to stay there once we withdraw the monetary policy support.
Question: I would like to touch on the four preconditions you mentioned earlier on this year which are necessary in order to get back to a kind of normal monetary policy. If I look at the revised inflation outlook, which is really less favourable than the last one, what is your expectation? Will we actually see within a three-year period any going back to a normal monetary situation?
Question: And secondly, if we look at this and we see that the economy picks up quite significantly in some countries, at the same time we have the fact that headline inflation is not picking up as we perhaps also would expect it: do n't we have to start thinking about whether the 2% target is still an appropriate one?
Draghi: The four conditions are in the definition of our objective, which is a durable, self-sustained convergence of the rate of inflation towards an inflation rate of close to but below 2%. So that stays there. That 's our objective. It 's not employment ; it 's not growth. Certainly the stronger is the economy, the stronger is the decline in unemployment rate, the more confident we become -- as we did today -- that the convergence is on its way to actually satisfy the conditions that I mentioned in its definition.
Draghi: Second point about inflation -- I said it at the beginning: nothing has substantially changed as far as inflation is concerned. There is going to be also in the coming months, by the way, a significant amount of volatility due to oil prices and food prices, but the underlying inflation is basically staying what it is today. So what we see now, based on the current information, is a path of low inflation, underlying inflation, and flat across time.
Question: The economy has started to improve nicely. Is it because of QE or despite QE?
Draghi: It 's because of QE. We are here because of that. QE has supported the recovery throughout. Let me just give you a few numbers to answer your question more fully. I 've just said, by the way, that growth has been just revised from 0.5% to 0.6% in the first quarter, and so the annual growth for this year is projected to be 2% rather than 1.9%. But also, if you look at various indices, the PMI, which is an index we use to assess the state of the economy, is now at the highest level since April 2011. The Economic Sentiment Index is close to the level it had in 2007, which is an all-time high. The unemployment rate was 9.3% in April: it 's the lowest since March 2009 -- with all the qualifications that I 've made before about having a broader concept of unemployment as one of the reasons why we do n't see much growth in nominal wages. And almost 5 million jobs have been created in the eurozone in the last three and a half years.
Draghi: So the risk of deflation has dissipated. The recovery is proceeding based on consumption and investment, and consumption and investment are growing because of QE also -- not only, but also QE. Because interest rates are low, labour income has increased ; wealth, households ' wealth has also increased. Financing conditions remain extremely favourable, and this is essentially because of QE. And the pass-through of our monetary policy decisions has probably never been as effective as it is today. So this is passed into lower lending rates, much closer spreads across the eurozone, closer spreads across sectors and between different companies. I think I 've said in the introductory statement that the SMEs are also benefiting greatly from the QE policy and from our monetary policy measures. So I think I 've answered fully your question.