In addition, the decline in the growth of loans to the private sector has come to a halt and credit demand has recently strengthened. These developments need to be closely monitored, as they may start to point to upward risks to price stability, in particular during a period of economic recovery. BIS Review 40/2002  1  Overall, the outlook for price stability is now less benign than it was in November 2001, when we last adjusted the key ECB interest rates. Inflation has so far declined less steeply and less rapidly than we expected at the turn of the year. This has been partly due to the temporary factors I mentioned before, and to the renewed increase in oil prices in the first quarter of 2002. At the current juncture, even though the appreciation of the exchange rate of the euro will contribute to easing inflationary pressures, we will continue to closely monitor all relevant developments, against the background of the risk that the deviations from price stability, which followed the exceptional clustering of upward shocks on inflation over the past couple of years, may be transmitted into longer-term inflation expectations, thereby potentially affecting wage and price-setting behaviour. In order to maintain price stability, it is crucial that wage moderation prevails in the future. In this respect, we are concerned about recent trends in wages. The importance of wage developments in line with our definition of price stability cannot be overemphasised.
The unemployment rate is 8-1/4 percent – well above the rate anyone on the FOMC sees as being consistent with our longer-run goal; in my view, this is a substantially higher rate than one might attribute to supply-side factors, such as extended unemployment insurance and a heightened degree of mismatch in labor markets. Realistically, this is a 2-1/4 to 3 percentage point deviation from our current maximum employment objective. Because this occurred with nominal interest rates stuck at the zero lower bound since December 2008, I believe it’s hard to say that we are not in a liquidity trap. Recently, the U.S. data have been more encouraging, with the labor market improving and private demand showing a little more traction. Without a doubt, these are welcome developments. But even the more optimistic forecasts see output increasing only moderately above its potential growth rates; no one has an expectation for a surge in activity that would quickly close resource gaps. At the same time, the outlook for inflation is subdued, with most FOMC participants’ forecasts for increases in total personal consumption expenditures prices averaging roughly between 1-1/2 and 2 percent over the next three years. Furthermore, private sector long-run inflation expectations are quite well anchored.