The developments that followed the 2008 crisis presented new challenges for the ECB. On the one hand, liquidity problems in the banking sector required the ECB to intervene in order to sustain the payment system. On the other hand, the ECB had to deal with low inflation, which was moving further away from the target of just under two percent. Although it lowered interest rates many times, inflation in the Euro area stayed just above zero percent. In some member states, inflation even dropped below zero percent. When it lowered key interest rates to 0.05 percent in September 2014, the ECB exhausted this monetary policy instrument without getting any closer to its goal of two percent inflation. At the same time, money supply growth (M3) remained below expectations. So the ECB decided in January 2015 to extend existing programmes to include an expanded asset purchase programme, or APP. It has since been buying bonds issued by central governments in the Euro area as well as supranational bonds issued by European institutions.
The ECB projects inflation of 1.0 percent in 2016 and 1.6 percent in 2017. Lending to non-financial businesses in the Euro area continually declined from the middle of 2012 until January 2015, when the trend reversed. There are major differences in terms of loan volume at national level too. Most banks in the countries hit hardest by the crisis continue to show lending restraint.
The ECB’s monetary policy is pursuing the right goals from the perspective of the industrial sector, and it is using appropriate means to achieve those goals. The APP and other purchase programmes are improving the monetary preconditions for reviving the European economy. First, the Euro area struggled with dangerously low inflation and the threat of a period of stagnation like that experienced by Japan in the 1990s. Second, business loan volume was at an historic low and investment needed to unlock growth potential was missing. Third, the nominal effective Euro exchange rate showed an upward trend from 2012 to 2014, tightened monetary conditions despite a weak economic situation, and reduced price competitiveness. The ECB’s monetary policy measures counteracted these developments as a side effect of creating price stability.