Statement by Governor Boštjan Vasle following the ECB’s monetary policy meeting

At the October meeting members of the Governing Council of the ECB decided to retain the monetary policy stance formulated at the September meeting, the full implementation of which is envisaged over following months. The key aim in the monetary policy stimulus thus remains creating financing conditions that through increased economic activity will push inflation closer to its desired target level, even in a weakening economy.

As expected, the economic situation in the euro area has deteriorated slightly in the last month. The principal slowdown in activity was in the service sector, as a result of the contraction in manufacturing seen for more than a year and a half, which has mostly been driven by international trade. Uncertainty still prevails, in connection with trade measures, the slowing growth in China, and Brexit. The worsening international environment has also begun to significantly affect the Slovenian economy, where growth is slowing, although it remains well above the euro area average.

The slowdown in international trade and falling energy prices have lowered inflation, the year-on-year rate sinking to 0.8% in the euro area in September, the lowest rate since 2016. Inflation in Slovenia remains higher than in the euro area overall, primarily as a result of higher wage growth and robust domestic demand.

Firms in the euro area are reporting a further decline in orders and output in the second half of the year. Construction activity and household consumption nevertheless remain robust, as demand for household loans is continuing to increase. The employment outlook is worsening slightly, which is reducing wage growth expectations. In keeping with the current deterioration, expectations with regard to economic activity and inflation have also been reduced, albeit only in the short term. They remain broadly unchanged over the long term.

Inflation’s divergence from its target level was one of the main reasons behind the monetary policy measures adopted in September. Insufficient time has passed for a full assessment of how successful the package has been in ensuring looser financing conditions and thus in raising economic activity, which should lead to a revival in inflation. Furthermore, not all of the announced instruments have been fully activated yet. The two-tier remuneration system for excess reserves enters into force on 30 October 2019, while the monthly net asset purchases of EUR 20 billion will begin in November.

Banks have the option of obtaining favourable long-term funding from the Eurosystem in the form of targeted operations (the TLTRO-III), provided that they earmark sufficient funds for financing the real sector. The measure thus aims to improve the conditions for bank lending to SMEs, which do not seek financing on the capital market; they are a vital part of our economy. Further support for the economy comes from the reinvestment of the principal payments from maturing securities. Bond purchases directly benefit large (multinational) enterprises in the main, via whom the benefits are transferred to Slovenian firms with ownership links to them, or simply with commercial links. The introduction of the two-tier remuneration system for excess reserves is also mitigating the effects of negative interest rates on banks, which is reducing the likelihood of banks passing these effects onto their customers. Not least, the positive effects of the expansionary monetary policy will also be felt by individuals, who are not merely savers, but are also workers, consumers and borrowers.

At the October meeting of the Governing Council, we left the interest rates on the euro area deposit facility unchanged, and maintained the reinvestment of principal payments from maturing securities purchased under the APP, and the future guidance regarding the monetary policy stance. We also reiterated our commitment to implementing the additional measures adopted in September (two-tier remuneration of excess reserves, a third TLTRO, the resumption of asset purchases). The central banks of the Eurosystem are aware that in maintaining negative interest rates over the longer term, the effects of these monetary policy measures cannot yet be fully evaluated. We therefore emphasise that reviving economic activity will demand a broad response from macroeconomic policy, including structural measures that increase growth potential, and fiscal policy measures. The latter is particularly true of the euro area countries that still have space for additional borrowing under the rules of the Stability and Growth Pact.