Real activity and financial conditions
The economic analysis assesses the short to medium-term determinants of price developments. The focus is on real activity and financial conditions in the economy. The economic analysis takes account of the fact that price developments over those horizons are influenced largely by the interplay of supply and demand in the goods, services and factor markets.
To do so, the ECB regularly reviews, inter alia,
- developments in overall output,
- demand and labour market conditions,
- a broad range of price and cost indicators,
- fiscal policy, and
- the balance of payments for the euro area.
The economic analysis also includes a thorough analysis of shocks hitting the euro area economy, their effects on cost and pricing behaviour and the short to medium-term prospects for their propagation in the economy.
Asset prices and financial yields
These variables are also analysed to derive information about the expectations of the financial markets, including expected future price developments. For example, when buying and selling bonds, financial market participants implicitly reveal their expectations about future developments in real GDP growth and inflation. Using a variety of techniques, a central bank can analyse financial prices to extract the markets’ implicit expectations about future developments.
The macroeconomic projections are produced under the responsibility of ECB/Eurosystem staff using a number of analytical and empirical models. The projections help to structure and synthesise a large amount of economic data. They ensure consistency across different sources of economic evidence.
They are a key element in sharpening the assessment of economic prospects and the short to medium-term fluctuations of inflation around its trend. Overall, projections play an important but not all-encompassing role in the ECB’s monetary policy strategy.