The oil price futures used in our forecasts turned out to be poor predictors in volatile oil markets.2  1  2  A recent BdF working paper argued that short-term unemployment is more meaningful than total unemployment when looking at the Phillips curve in the US. Cf. Ferrara L. and Sestieri G. in Banque de France, Quarterly Selection of Articles, No. 36, Winter 2014-2015. Bec, Frédérique and Annabelle De Gaye (Nov. 2014), “How do oil price forecast errors impact inflation forecast errors? An empirical analysis from French and U.S. inflation forecasts.” Banque de France Working Paper 523. BIS central bankers’ speeches  1  But downside surprises also occurred for core inflation suggesting the need for complementary explanations. One candidate is the continuous appreciation of the euro between mid-2012 and the beginning of 2014, which has lowered prices of many imported non-energy industrial goods. One can expect this impact to be transitory as the euro has subsequently depreciated since the middle of 2014. This depreciation reflects the differences in the growth cycle between the euro area and its main partners and accordingly the differences in monetary policy. Those explanations do not account for the slowdown in domestic prices, which must then be attributed to an increase in domestic slack. For the European Commission the output gap widened from −2% in 2012 to −3% in 2013.
Nevertheless, in the last couple of years, most measures of inflation expectations, be they survey-based or market-based, have pointed in the same direction of a prolonged period of too low inflation, well below our target of being close to but below 2% over the medium term. As a consequence, monetary policy has become progressively more accommodative. First, in a context of fixed rate full allotment introduced on the 15th of October in 2008 to offset liquidity risk in the market by ensuring banks’ continued access to liquidity, we have introduced forward guidance to avoid an unwarranted tightening of the effective monetary policy stance. Initially implemented in July 2013, this guidance was “firmly reiterated” in early 2014 and remains in place today. Second, the Eurosystem introduced targeted longer-term refinancing operations (TLTROs) and the asset purchase programs for covered bonds and asset-backed securities in June 2014, with the goal of improving the transmission of our monetary policy. Third, the main refinancing rate was cut to 5 basis points and the deposit rate entered into negative territory in two steps (–20 basis points). However, by January this year it was clear that economic recovery as well as monetary and credit indicators were too weak to bring medium term inflation close to but below 2%. Marketbased measures of inflation expectations, even if prone to liquidity shocks, had been falling further below the target and at longer term horizons. The Governing Council was determined to act boldly to counteract the risk of a too low for too long inflation.