Governor’s statement following the ECB’ monetary policy meeting

The epidemiological situation in Europe, including in Slovenia, is undergoing a sustained deterioration. The economic recovery has consequently lost momentum in recent weeks. Amid a less pronounced downturn on the financial markets, the risks to the realisation of the June economic growth forecasts are increasing on a daily basis. The Governing Council of the ECB has taken a number of steps to provide monetary policy stimulus over the course of the year, and yesterday our assessment was that these were still providing sufficient support for the euro area economy even in the adverse situation. We will examine the situation again at the December meeting, when new economic projections will be ready, and will adjust our measures as circumstances dictate.

Although certain indicators for the third quarter are providing evidence of a recovery in the euro area as foreseen in the June projections, the deteriorating epidemiological picture (numerous countries are seeing record case numbers on a daily basis) and the (announced) containment measures are worsening the outlook for the end of the year. Further evidence of the deterioration in the macroeconomic picture in the final quarter comes from certain high-frequency indicators, which in recent months have proved to be an effective tool in assessing the state of the economy. A new comprehensive projection will be released in December.

In Slovenia too the epidemiological picture is drastically deteriorating, and urgent containment measures have again been put in place. Banka Slovenije’s assessment is that services will be worst affected, as in the spring. The risks to the realisation of the June economic growth forecasts (a 6.5% decline this year followed by growth of 4.9% next) are growing from day to day. Our expectation is that the current deterioration will be reflected most evidently next year.

The deterioration in the situation and in the expectations are already being reflected, to a lesser extent, on the financial markets. It is in the segment of the highest risk instruments, such as shares and lower-rated private-sector bonds, where the situation is most acute. Yields on lower-risk bonds, such as euro area government bonds, fell in all euro area countries, hitting record lows in many places (for example, 10-year Slovenian government bonds are currently trading at -0.10%).

The financial markets’ milder response to the weakening economic environment is a consequence of strongly supportive monetary policy. The ECB has strongly expanded its asset purchases in recent months, and has introduced additional longer-term refinancing operations at extremely favourable terms, while broadening the collateral criteria. As evidence of the sheer magnitude of the measures, the Eurosystem balance sheet has increased by almost 45% this year, or by 17% of last year’s GDP. This is holding the risk-free interest rate benchmark, which serves as a base rate for forming the prices of other financial instruments, at low levels.

Our assessment at yesterday’s meeting of the Governing Council was that the current accommodative monetary policy is contributing to the maintenance of favourable financing conditions for all sectors and all regions of the euro area, and is thus providing key support for economic activity and medium-term price stability. In the current situation, dominated by the high risks surrounding further recovery, we will carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines and developments in the exchange rate. The new round of projections in December will allow for a thorough reassessment of the economic outlook. On the basis of all of the above, we will recalibrate our measures at the December monetary policy meeting, to respond to the unfolding situation.

Figure: Epidemiological picture in the euro area and stringency of containment measures

Sources: University of Oxford, www.worldometer.info