The June 2014 Eurosystem staff macroeconomic projections foresee a gradual increase in annual HICP inflation towards levels consistent with our definition of price stability. The pace of the increase is, however, slow. From 0.7% in 2014, inflation is expected to reach 1.1% in 2015 and, more uncertainly, 1.4% in 2016. All three figures have been revised downward in comparison with the March 2014 ECB staff macroeconomic projections and portray a situation distant from our objective of keeping inflation below but close to 2% in the medium-term. Inflation developments alone go a long way in motivating the combination of the measures announced by the Governing Council of the ECB on 5 June, to provide additional monetary policy accommodation and to support lending to the real economy. This package included further reductions in the key ECB interest rates, new longer-term refinancing operations targeted to stimulate credit creation, and preparatory work related to outright purchases of asset-backed securities. In addition, the ECB committed to an extension of the fixed-rate full allotment regime in tender procedures and decided to suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme. Over time these measures will contribute to a return of inflation to levels closer to 2% and safeguard the anchoring of medium to long-term inflation expectations. Nevertheless, with policy interest rates close to the effective lower bound and persistently timid growth prospects, there is a small, but non-insignificant risk that any additional adverse shock may open the door to a more protracted period of low inflation.
The increase in the balance sheet was dependent on the demand of primary liquidity by the banks, facilitated however, by the provision of liquidity through a regime of fixed rate full allotment of banks’ demand, introduced in September 2008. The impact on overall monetary conditions was, as before the crisis, dependent on the behaviour of the banks to passthrough the higher monetary base into credit and broad money, which did not happen. What did happen was a justified fulfilment of the role of lender of last resort but not a new type of monetary policy instrument in the sense of aiming at a new transmission channel. The adoption of a fixed-rate full allotment regime of liquidity provision, which has been in place since and was recently extended until December 2016 (at the very least) was indeed an extraordinary unconventional measure. It supported the banking sector and avoided a more detrimental credit crunch. However, the size of our monetary base declined significantly during 2013 when banks decided to start the repayment of their previous high borrowings. On the other hand, as per the following table, total outright purchases of assets by the ECB under two different programmes was not behind the increase of the balance sheet as they represent a relatively small proportion of total assets compared with other central banks.