Governor’s statement following the ECB’s monetary policy meeting, with commentary on the current situation

The Governing Council of the ECB was briefed yesterday on the latest macroeconomic projections for the euro area. They show inflation continuing to slow and economic growth gradually recovering over the period to 2026. In these circumstances we took the decision on the Governing Council to again leave the ECB’s key interest rates unchanged. We also decided to advance the normalisation of the monetary policy securities portfolio.

Discussed by the Governing Council yesterday, the latest projections for the period of 2023 to 2026 forecast a further slowdown in inflation and a gradual recovery in economic growth. In light of the current dynamics, real GDP growth will stand at 0.6% this year, before strengthening to 0.8% in 2024 and 1.5% in 2025 and 2026 amid the positive effects of falling inflation, strengthening real household income, and the improving situation in global trade. Inflation will continue falling over the projection horizon, with core inflation becoming the main engine, driven by rising labour costs, following the slowdown in energy price inflation and food price inflation. The inflation rate will average 5.4% this year, and 2.7% next year. It will slow further as the deflationary effects of monetary policy are maintained, reaching 2.1% in 2025 and 1.9% in 2026.

Banka Slovenije also expects similar developments in Slovenia. The projections will be presented in full in the middle of next week.

In light of the slightly weaker macroeconomic data and the slowdown in inflation, the financial markets have seen bond yields fall discernibly since October’s meeting of the Governing Council. The markets have increased their expectations of a cut in key interest rates by global central banks in 2024. Expected interest rates in the euro area are now lower than the interest rates that were assumed in the Eurosystem macroeconomic projections. The decline in the risk-free yield curve in the euro area was also reflected in other market segments: yields on euro area government bonds and private-sector bonds fell, while stock market indices rose. This indicates that the financing conditions for issuers on the financial markets have improved, and that the prices of financial instruments are not reflecting market expectations of a sharper economic contraction in the euro area in 2024.

Based on the latest data and the updated projections, the Governing Council decided to leave the ECB’s key interest rates unchanged. Our assessment is that if maintained sufficiently long, the current level of interest rates will make a significant contribution to the timely return of inflation to its target level. The next steps will depend on the situation as it stands at the time, in particular on the economic and financial data, developments in core inflation, and the effectiveness of our measures. Our decisions will continue to ensure that interest rates are kept at sufficiently restrictive levels for as long as it takes for inflation to return to our 2% target in a timely manner.

The ECB’s key interest rates are the Governing Council’s main tool in determining the monetary policy stance. In light of the above, the Governing Council also decided yesterday to advance the process of the normalisation of the Eurosystem’s balance sheet, and to downsize the monetary policy securities portfolio. We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024. Over the second half of the year we intend to reduce the PEPP portfolio by EUR 7.5 billion per month on average. We intend to discontinue reinvestments under the PEPP at the end of 2024.