Governor’s statement following the ECB’s monetary policy meeting

The strong economic recovery is continuing in the euro area, including Slovenia, but is losing a little momentum as constraints on the supply side disrupt performance in manufacturing and certain services. The financing conditions remain favourable for the government sector and for private-sector issuers alike.

Inflation in the euro area has risen in recent months, driven by rising energy prices, a strong recovery in demand amid supply-side constraints, and base effects. The assessment of the Governing Council of the ECB is that inflation will remain elevated over the coming months, before beginning to ease over the course of next year. We should reiterate that we are closely monitoring the evolution of the risk of higher inflation over the medium term. Banka Slovenije can clarify that the risks relate primarily to rising inflation expectations and the upward pressure on wages in certain segments of the labour market.

In this situation the members of the Governing Council decided to maintain all the instruments put in place to date, thereby continuing to ensure ample liquidity and favourable financing conditions for the banking sector, the non-banking sector and the governments of the Eurosystem.

The high economic growth seen in the second quarter in the euro area continued in the third quarter, although it weakened slightly over the quarter. The rapid recovery in private demand continued to be the main driver of economic growth, which is also being reflected in an improvement in the situation on the labour market. However, disruptions to global supply chains are constraining supply, most notably in manufacturing, but also in services. At the same time the pace of the recovery means that firms are again reporting labour shortages, despite employment still being down on its pre-crisis level.

Inflation in the euro area has been rising in recent months (to stand at 3.4% in September), driven by rising energy prices, a strong recovery in demand amid supply-side constraints, and base effects. Already these factors are also being reflected in core inflation, most evidently in prices of non-energy industrial goods, which in September were up 2.1% in year-on-year terms. The conditions for higher wage growth are strengthening in this context. The assessment of the Governing Council of the ECB is that inflation will remain elevated over the coming months, before beginning to ease over the course of next year. We are closely monitoring the evolution of the risk of inflation over the medium term.

Banka Slovenije can clarify that the risks relate primarily to rising inflation expectations and the upward pressure on wages in certain segments of the labour market.

Amid strengthening global inflationary pressures and the expectation that major central banks would respond by gradually dialling back the accommodative stance of monetary policy, borrowing costs rose on debt securities markets. The required yield on 10-year Slovenian government bonds rose from less than zero to 0.25% from early September, comparable to the rise in borrowing costs in other euro area countries. The financing conditions nevertheless remain favourable for the government sector and for private-sector issuers alike, a reflection of the ECB’s highly accommodative monetary policy.

It remains important from a monetary policy perspective that in keeping with our medium-term stance we do not act prematurely, and continue ensuring favourable financing conditions with the aim of achieving a robust recovery and meeting the inflation target. Should there be signs over the months ahead that inflationary pressures are becoming more sustained, we are ready at the Governing Council to use all instruments to address them in keeping with our updated strategy and our symmetric 2% inflation target.