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EUROPEAN CENTRAL BANK MONTHLY BULLETIN

EN

MONTHLY BULLETIN

AUGUST0112010

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MONTHLY BULLETIN

AUGUST 2010

In 2010 all ECB publications feature a motif taken from the €500 banknote.

© European Central Bank, 2010

Address

Kaiserstrasse 29

60311 Frankfurt am Main

Germany

Postal address

Postfach 16 03 19

60066 Frankfurt am Main

Germany

Telephone

+49 69 1344 0

Website

http://www.ecb.europa.eu Fax +49 69 1344 6000

This Bulletin was produced under the

responsibility of the Executive Board of the ECB. Translations are prepared and published by the national central banks.

All rights reserved. Reproduction for

educational and non-commercial purposes is permitted provided that the source is acknowledged.

The cut-off date for the statistics included

in this issue was 4 August 2010.

ISSN 1561-0136 (print)

ISSN 1725-2822 (online)

3 ECB

Monthly Bulletin

August 2010

CONTENTS

EDITORIAL 5

ECONOMIC AND MONETARY

DEVELOPMENTS 9

The external environment of the euro area 9

Monetary and fi nancial developments 14

Prices and costs 48

Output, demand and the labour market 61

Exchange rate and balance of payments

developments 67

Boxes:

The funding of euro area MFIs through 1

the issuance of debt securities 17

The results of the July 2010 bank 2

lending survey for the euro area 22

Covered bond market developments 3

and the covered bond purchase programme 32

An assessment of the capital shortfall 4

revealed in the EU-wide stress-testing exercise 40

Integrated euro area accounts 5

for the fi rst quarter of 2010 42

Euro area house prices and the rent 6

component of the HICP 49

Results of the ECB Survey of Professional 7

Forecasters for the third quarter of 2010

56

The introduction of the euro in Estonia 8

on 1 January 2011 69

ARTICLES

Oil prices - their determinants

and impact on euro area infl ation and the macroeconomy 75

Recent developments in global

and euro area trade 93

Harmonised ECB statistics on euro area

investment funds and their analytical use for monetary policy purposes

109EURO AREA STATISTICS S1

ANNEXES

Chronology of monetary policy

measures of the Eurosystem I

Documents published by the European

Central Bank since 2009

V

Glossary XIII

4 ECB

Monthly Bulletin

August 2010

ABBREVIATIONS

COUNTRIES LU Luxembourg

BE Belgium HU Hungary

BG Bulgaria MT Malta

CZ Czech Republic NL Netherlands

DK Denmark AT Austria

DE Germany PL Poland

EE Estonia PT Portugal

IE Ireland RO Romania

GR Greece SI Slovenia

ES Spain SK Slovakia

FR France FI Finland

IT Italy SE Sweden

CY Cyprus UK United Kingdom

LV Latvia JP Japan

LT Lithuania US United States

OTHERS

BIS Bank for International Settlements

b.o.p. balance of payments BPM5 IMF Balance of Payments Manual (5th edition)

CD certi

fi cate of deposit c.i.f. cost, insurance and freight at the importer's border

CPI Consumer Price Index

ECB European Central Bank

EER effective exchange rate

EMI European Monetary Institute

EMU Economic and Monetary Union

ESA 95 European System of Accounts 1995

ESCB European System of Central Banks

EU European Union

EUR euro

f.o.b. free on board at the exporter's border

GDP gross domestic product

HICP Harmonised Index of Consumer Prices

HWWI Hamburg Institute of International Economics

ILO International Labour Organization

IMF International Monetary Fund

MFI monetary

fi nancial institution NACE statistical classifi cation of economic activities in the European Union

NCB national central bank

OECD Organisation for Economic Co-operation and Development

PPI Producer Price Index

SITC Rev. 4 Standard International Trade Classifi cation (revision 4)

ULCM unit labour costs in manufacturing

ULCT unit labour costs in the total economy

In accordance with EU practice, the EU countries are listed in this Bull etin using the alphabetical order of the country names in the national languages. 5 ECB

Monthly Bulletin

August 2010

Based on its regular economic and monetary

analyses, the Governing Council at its meeting on 5 August 2010 viewed the current key

ECB interest rates as appropriate and therefore

decided to leave them unchanged. Considering all the new information which has become available since its meeting on 8 July 2010, the Governing Council continues to expect price developments to remain moderate over the policy-relevant medium-term horizon, bene fi ting from low domestic price pressures.

The available economic data and survey-based

indicators suggest a strengthening in economic activity in the second quarter of 2010, and the available data for the third quarter are better than expected. Looking further ahead, and taking into account a number of temporary factors, the Governing Council continues to expect the euro area economy to grow at a moderate and still uneven pace, in an environment of uncertainty. The monetary analysis confi rms that infl ationary pressures over the medium term remain contained, as suggested by weak money and credit growth. Overall, the Governing

Council expects price stability to be maintained

over the medium term, thereby supporting the purchasing power of euro area households. In fl ation expectations remain fi rmly anchored in line with the aim of keeping infl ation rates below, but close to, 2% over the medium term.

The fi rm anchoring of infl ation expectations

remains of the essence.

Monetary policy will do all that is needed to

maintain price stability in the euro area over the medium term. This is the necessary and central contribution that monetary policy makes to fostering sustainable economic growth, job creation and fi nancial stability. All the non- standard measures taken during the period of acute fi nancial market tensions, referred to as "enhanced credit support" and the Securities

Markets Programme, are fully consistent

with the Governing Council's mandate and, by construction, temporary in nature. The

Governing Council remains fi rmly committed

to price stability over the medium to longer term. The monetary policy stance and the

overall provision of liquidity will be adjusted as appropriate. Accordingly, the Governing Council will continue to monitor all developments over the period ahead very closely.

Turning to the economic analysis, after a period

of sharp decline, euro area economic activity has been expanding since mid-2009. Euro area real

GDP increased, on a quarterly basis, by 0.2% in

the fi rst quarter of 2010. The available economic data and survey-based indicators suggest a strengthening in economic activity in the second quarter of 2010, and the available data for the third quarter are better than expected. Looking further ahead, and taking into account temporary effects, the Governing Council continues to expect real GDP to grow at a moderate and still uneven pace over time and across economies and sectors of the euro area. Ongoing growth at the global level and its impact on the demand for euro area exports, together with the accommodative monetary policy stance and the measures adopted to restore the functioning of the fi nancial system, should continue to support the euro area economy. However, the recovery in activity is expected to be dampened by the process of balance sheet adjustment in various sectors and labour market prospects.

In the Governing Council's assessment, the risks

to the economic outlook are broadly balanced in an environment of uncertainty. On the upside, the global economy and foreign trade may recover more strongly than is now projected, thereby further supporting euro area exports.

On the downside, concerns remain relating to

the emergence of renewed tensions in fi nancial markets, renewed increases in oil and other commodity prices, and protectionist pressures, as well as the possibility of a disorderly correction of global imbalances.

With regard to price developments, euro area

annual HICP in fl ation increased to 1.7% in July, according to Eurostat's fl ash estimate, from

1.4% in June, most likely owing to upward

base effects in the energy and food components.

In the next few months, annual HICP infl ation

rates are expected to display some further volatility around the current level. Looking

EDITORIAL

6 ECB

Monthly Bulletin

August 2010

further ahead, in 2011 infl ation rates should remain moderate overall, benefi ting from low domestic price pressures. Infl ation expectations over the medium to longer term continue to be fi rmly anchored in line with the Governing

Council's aim of keeping infl ation rates below,

but close to, 2% over the medium term.

Risks to the outlook for price developments are

broadly balanced. Upside risks over the medium term relate, in particular, to the evolution of commodity prices. Furthermore, increases in indirect taxation and administered prices may be greater than currently expected, owing to the need for fi scal consolidation in the coming years. At the same time, risks to domestic price and cost developments are contained. Overall, the Governing Council will monitor closely the future evolution of all available price indicators.

Turning to the monetary analysis, the annual

growth rate of M3 turned positive and was

0.2% in June 2010, after -0.1% in May.

The annual growth rate of loans to the private

sector increased slightly further but, at 0.3%, remained weak. Together, these data continue to support the assessment that the underlying pace of monetary expansion is moderate and that in fl ationary pressures over the medium term are contained. Shorter-term developments in M3 and some of its components and counterparts have remained volatile, and this volatility may well persist.

The previously strong impact of the interest rate

constellation on monetary dynamics, while still affecting the pace of underlying money growth, appears to be gradually waning. This implies a gradual reduction in the effect on actual M3 growth arising from the downward impact of the steep yield curve and the associated allocation of funds into longer-term deposits and securities outside M3. At the same time, the annual growth rate of M1 has continued to moderate, although it remained strong at 9.2% in June 2010. In part, this re fl ects somewhat higher opportunity costs of holding overnight deposits relative to other

short-term deposits. The still weak annual growth rate of bank loans to the private sector continues to conceal countervailing developments, with increasingly positive growth in loans to households and stabilised negative annual growth in loans to non-fi nancial corporations. A lagged response

of loans to non- fi nancial corporations to developments in economic activity is a normal feature of the business cycle.

The data up to June indicate that, after

expanding for a few months earlier in the year, the size of banks' overall balance sheets has not increased further. The challenge remains for banks to expand the availability of credit to the non- fi nancial sector when demand picks up. Where necessary, to address this challenge, banks should retain earnings, turn to the market to strengthen further their capital bases or take full advantage of government support measures for recapitalisation.

In this respect, the Governing Council welcomes

the EU-wide stress-testing exercise, which was prepared and conducted by the Committee of European Banking Supervisors (CEBS) and national supervisory authorities, in close cooperation with the ECB. This stress-testing exercise was comprehensive and rigorous, and the results con fi rm the resilience of EU and euro area banking systems as a whole to severe economic and fi nancial shocks. The stress test has also signi fi cantly enhanced transparency regarding the current fi nancial conditions and risk exposures of the 91 institutions that participated in the exercise.

Hence, the exercise represents an important step

forward in restoring market confi dence.

The Governing Council also welcomes the

commitment made by national authorities with regard to the provision of support facilities for banks where private sector means are insuffi cient.

Sound balance sheets, effective risk management

and transparent, robust business models are key to strengthening banks' resilience to shocks and to ensuring adequate access to fi nance, thereby laying the foundations for sustainable growth, job creation and fi nancial stability. 7 ECB

Monthly Bulletin

August 2010

EDITORIAL

To sum up, the current key ECB interest rates

remain appropriate. Considering all the new information which has become available since its meeting on 8 July 2010, the Governing

Council continues to expect price developments

to remain moderate over the policy-relevant medium-term horizon, benefi ting from low domestic price pressures. The available economic data and survey-based indicators suggest a strengthening in economic activity in the second quarter of 2010, and the available data for the third quarter are better than expected. Looking further ahead, and taking into account a number of temporary factors, the

Governing Council continues to expect the euro

area economy to grow at a moderate and still uneven pace, in an environment of uncertainty.

A cross-check of the outcome of the economic

analysis with that of the monetary analysis con fi rms that infl ationary pressures over the medium term remain contained, as suggested by weak money and credit growth. Overall, the Governing Council expects price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. In fl ation expectations remain fi rmly anchored in line with the aim of keeping in fl ation rates below, but close to, 2% over the medium term. The fi rm anchoring of infl ation expectations remains of the essence.

Turning to fi scal policies, it is essential that

budget plans for 2011 and beyond refl ect a strong commitment to returning to sound public fi nances. Given the exceptional fi scal deterioration over the past two years, there is an urgent need to implement credible medium-term consolidation strategies aimed at restoring fi scal sustainability and creating room for budgetary manoeuvre. As a minimum, countries' budgetary targets must comply with thequotesdbs_dbs31.pdfusesText_37

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