Governor’s statement following the ECB’ monetary policy meeting

The euro area will see a large decline in economic activity this year as the coronavirus pandemic hits, while a recovery is expected next year. The Governing Council of the ECB was also briefed yesterday on the inflation forecasts: inflation will remain low over the coming months, but is expected to rise after the pandemic ends. In these circumstances we decided to maintain the extremely accommodative monetary policy stance, and recalibrated the key measures put in place in the early part of the crisis.

Yesterday the Governing Council of the ECB discussed the latest economic forecasts. Euro area GDP is expected to decline by 7.3% in real terms in 2020, before recovering by 3.9% in 2021. According to the latest forecasts, the pre-crisis level of economic activity will be regained by the second half of 2022. The low economic growth will also be reflected in low inflation. It will stand at 0.2% this year, and will reach 1.4% by the end of 2023, thus remaining well short of its target of close to but below 2%.

The forecasts for the euro area also provide the basis for drawing up the latest forecasts for Slovenia, which Banka Slovenije is expected to release next week.

The forecasts remain heavily influenced by the course of the pandemic and the related containment measures on one side, and the monetary and fiscal policy measures put in place on the other. The GDP figures for the third quarter were better than expected, but the reimposition of containment measures brought a slowdown in the recovery. A renewed decline in economic activity is expected during the final part of the year. There remain considerable gaps between individual sectors of the economy: services have been hit significantly harder by the second wave of the pandemic than manufacturing.

The encouraging news about the manufacture and distribution of a vaccine is raising hopes of a solution to the health crisis, but the risks currently being faced remain significant. At yesterday’s meeting the Governing Council of the ECB thus recalibrated some of the key measures put in place in the early part of the crisis. The recalibration of the key crisis instruments will help to preserve favourable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability.

Key instruments introduced or adjusted during the crisis were recalibrated with the aim of meeting this objective and maintaining an extremely accommodative policy stance. The most important changes relate to the pandemic emergency purchase programme and the targeted longer-term refinancing operations (PEPP and TLTRO III):

1. PEPP: The horizon for net purchases has been extended by nine months, i.e. to at least the end of March 2022, while the envelope for asset purchases has been increased by EUR 500 billion to a total of EUR 1,850 billion.
2. TLTRO III: The period over which considerably more favourable terms will apply has been extended by 12 months (to June 2022), three additional operations in which banks can participate will be conducted, and the total amount that banks will be entitled to borrow has been raised.

Banka Slovenije can clarify that the changes to asset purchases are a consequence of the crisis lasting longer than originally expected. The central banks of the Eurosystem will therefore make the aforementioned asset purchases for a longer period, thereby supporting more favourable financing conditions, which ultimately will reduce risks and encourage consumption, while helping to meet our primary objective of price stability. It is a similar case with the other instrument, the TLTRO III, which is allowing the Eurosystem to provide emergency liquidity to the banking system over the long term, provided that it directs it into lending for businesses and households, thus encouraging activity. To this end the temporary collateral easing measures have also been extended to June 2022.

Banka Slovenije reiterates that within the framework of the Eurosystem we stand ready to adjust all of our instruments should the situation change.

The aforementioned measures are allowing the accommodative monetary policy to have equal effect across all countries. They are ensuring that Slovenia has unfettered access to financial markets, and thus to funding for its extensive packages of fiscal policy measures at interest rates that remain at record low levels. In addition, the possibility of securing additional liquidity at extremely favourable terms is allowing banks operating in Slovenia to maintain the supply of credit to their customers at very encouraging terms.