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

The euro area recorded favourable economic growth in the first half of this year, expecting this growth to slow down significantly over the coming quarters. The forecast published today predicts 3.1% growth this year, with the growth forecast slowing to 0.9% next year due to Russia’s military aggression. Inflation is expected to reach 8.1% on average this year, then it is expected to decline gradually in the coming year.

In these circumstances members of the European Central Bank Governing Council have decided to move forward decisively with the normalisation of monetary policy. We have raised ECB’s key interest rates by 75 basis points. After a protracted period of unchanged interest rates, this is the second consecutive interest rate hike this year. The interest rate hikes and their impact on the financing conditions will prevent current inflation expectations from extending over the medium term.

After favourable economic growth in the first half of the year, the outlook for economic growth in the euro area is expected to deteriorate significantly in the remainder of the year. In the wake of the economic downturn on energy markets due to the continued Russian military aggression in the Ukraine and the minor but still evident restrictions in supply chains, the stagnation in activity is currently limited to manufacturing. However, due to increasing living costs and uncertainty regarding future economic trends, growth in demand for services, which grew significantly after the economy was re-opened following the lifting of measures associated with the coronavirus, has also cooled down.

The inflation rate increased to 9.1% in August. In light of strong price pressure along the price chain, inflation pressures continue to broaden, while the level of core inflation, which excludes energy prices and food, rose to 4.3% in August. Despite slightly lower year-on-year growth, high energy prices continue to be the main factor in headline inflation. Their 38.3% year-on-year growth is the result, in particular, of extremely high electricity and gas prices.

The forecasts that members of the ECB’s Governing Council discussed at yesterday’s meeting indicate that the level of economic activity over the medium term will be lower than in previous forecasts, while growth in prices will continue to increase. This year’s 3.1% economic growth is expected to slow down in the coming year to 0.9%, and strengthen again to 1.9% in 2024. Due to strong cost pressures, inflation is expected to persist at high levels for a bit longer and reach 8.1% on average this year. Assuming that the circumstances on energy markets stabilise, disruptions to supply chains are eliminated and cost pressures normalise, inflation is expected to decline going forward and reach 5.5% in 2023 and 2.3% in 2024. In addition to the core forecast, members of the Governing Council of the ECB were also apprised of the adverse scenario, which assumes the complete and permanent suspension of energy deliveries from Russia and the partial suspension of production in the euro area. In light of this adverse scenario, real GDP would contract by 0.9% in the coming year, with inflation reaching 6.9%.

Borrowing costs have thus increased additionally both in the public and private sectors since the July session of the Governing Council. Their increase reflects the expectations of market participants of continued interest rate hikes in the Eurosystem aimed at slowing inflation. Like in other countries in the euro area, the yield on 10-year Slovenian government bonds has also grown, i.e. to around 2.6%. The premium over the 10-year German government bond, the yield of which is around 1.6%, remained at a similar level of that at the end of July. Borrowing costs also increased for the private sector of the euro area, both in the bond and equities segments. The scope of net issued private sector shares and bonds still remains robust, which also applies to lending to non-financial corporations by banks.

Based on the latest economic trends and new forecasts, the ECB Governing Council has decided to move forward decisively with the normalisation of monetary policy. We have raised all three ECB key interest rates by 75 basis points. This is the second consecutive interest rate hike this year after a protracted period of unchanged interest rates, following the July 50 basis point hike. Here we anticipate the further raising of interest rates also going forward, with the level of the rises depending on medium-term inflation outlooks. The interest rate hikes and their impact on the financing conditions will prevent current inflation expectations from extending over the medium term. The aim of the members of the ECB’s Governing Council is for inflation to stabilise at 2% over the medium term.