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

Last year, economic growth in the euro area reached a high of 5.3% and this favourable trend with regard to economic activity (3.7%) is expected to continue this year despite significant impact from Russian military aggression. With continued economic recovery and strong price pressures from the international environment, inflation is becoming increasingly broad-based and remains high. In addition, future price developments will be strongly affected by the effects of Russian military aggression.

Even though economic activity is expected to remain solid despite Russian military aggression, yesterday the members of the Governing Council decided to adjust the monetary policy due to the increasingly broad-based inflation and greater uncertainty. The key decisions include (i) retaining all possibilities to take action, (ii) gradually reducing the monthly net asset purchases under the APP and, if the situation so permits, concluding these purchases in the third quarter, and (iii) gradually adjusting the key interest rates some time after the end of the asset purchases. This will ensure that inflation stabilises at its 2% target over the medium term.

Before the Russian invasion of Ukraine, the post-pandemic recovery of economic activity in the euro area continued, with real GDP reaching its pre-pandemic level in the final quarter of last year. Growth slowed somewhat towards the end of the year because of the deteriorated epidemiological situation but, due to a relaxation in the containment measures, in February the high-frequency indicators already pointed to economic activity picking up again. Inflation remains high as recovery continues. Due to a surge in energy prices and supply bottlenecks, inflation is becoming increasingly broad-based, increasing to 5.8% in February.

Russian military aggression and its effects will have an impact on both economic activity and price dynamics in the euro area. A decline in foreign demand and deteriorating economic sentiment will dampen growth to some extent and, at the same time, inflation will increase due to higher energy prices. The projections discussed by the members of the Governing Council at this meeting show that this year economic growth in the euro area is expected to be 3.7%, which is half a percentage point lower than predicted in December. On the other hand, a surge in energy prices and the prices of other raw materials, which also cause prices to rise across other sectors, will accelerate inflation, which is expected to stand at 5.1% this year. With the anticipated decrease in energy prices in 2023 and 2024, inflation will gradually slow down and stabilise close to our 2% target.

Due to the adverse geopolitical situation, volatility in financial markets has increased and liquidity has deteriorated. The financing conditions have also deteriorated, slightly more for the private than the government sector. The interest rates on borrowing for the private sector have increased more significantly, but the new levels remain close to the average levels that predominated in 2018 in 2019. The required yield on 10-year Slovenian government bonds is around 1%, whereas on German bonds with comparable maturity it is around 0.2%. Despite increased volatility and poorer liquidity, financial markets in all the euro area countries provided the euro area businesses and state entities with uninterrupted access to financial resources.

Hence, yesterday the members of the Governing Council decided that in the second quarter the size of net asset purchases under the APP will be smaller than the one announced in December. Monthly net purchases under the APP will amount to EUR 40 billion in April, EUR 30 billion in May and EUR 20 billion in June. If the situation so permits, the Governing Council will conclude net purchases under the APP in the third quarter. In light of increased uncertainty, we have also adjusted the timeline of changes in interest rates. By expanding this possibility of taking action, we have ensured that some time after the end of the net asset purchases an adjustment in interest rates will also take place, but but this will not happen as soon as was originally envisaged.

The members of the Governing Council stand ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term.