The European Central Bank’s governing council has kept interest rates on hold and reaffirmed its plans to run quantitative easing to March 2017 or beyond if needed. The European Central Bank also revised its estimates of growth. The recovery in activity in the euro area is expected to continue, albeit at a somewhat weaker pace than earlier expected, and this is reflected in some downward revisions to the growth outlook. This is mainly due to the Brexit vote, according to Mario Draghi, the President of the ECB. According to the September 2016 ECB staff macroeconomic projections for the euro area, annual real GDP will be increasing by 1.7% in 2016, by 1.6% in 2017 and by 1.6% in 2018. Compared with the June 2016 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised downwards slightly.

ECB also estimates extremely low inflation over the next few months before starting to pick up towards the end of 2016. According to Draghi, inflation rates should increase further in 2017 and 2018 due to monetary policy measures that were implemented and the expected economic recovery. Annual HICP inflation at 0.2% in 2016, 1.2% in 2017 and 1.6% in 2018 is foreseen. On the graph below, it can be seen that ECB is struggling to reach its aim and keep the inflation rate below but close to 2% over the past 10 years.

 

euro-area-inflation-cpi
Source: tradingeconomics.com

Below, we can also see that Europe has not experienced such a long period of extremely low or negative inflation in the past 30 years.

euro-area-inflation-cpi-1
Source: tradingeconomics.com

ECB also encourages local governments claiming that fiscal policies should also support the economic recovery, while remaining in compliance with the fiscal rules of the European Union. At the same time, all countries should strive for a more growth-friendly composition of fiscal policies.