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

The latest data shows economic activity continuing to stagnate in the euro area in the first quarter of this year, while inflation is continuing to gradually fall. Because the key ECB interest rates are currently at levels that are making a substantial contribution to reducing inflation to its 2% target rate, the Governing Council has decided to leave the rates unchanged. Our next steps will continue to be decided on a meeting-by-meeting approach. Here our future analysis of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission will remain key. Should this support our assessment that inflation is converging to the target in a sustained manner, it would be appropriate to begin easing the restrictive monetary policy stance.

The indicators show that the euro area economy continued to stagnate in the first quarter of this year. Manufacturing is continuing to face a decline in activity, but the service sector has returned to growth. After nine months of negative outlook, the composite PMI for the euro area returned to the zone of moderate growth in March, while the forward-looking indicators suggest that the recovery in economic activity is set to continue in the future. Unemployment remains at a record low, although there are signs of a gradual easing in demand for labour. Inflation in the euro area fell further to 2.4% in March, according to the Eurostat flash estimate. The largest factor in the fall was the slowdown in food price inflation, which stood at 2.7%, its lowest rate since November 2021. Core inflation meanwhile slowed to 2.9%, and is being maintained at elevated levels by high service price inflation. The pass-through of rises in labour costs remains the main driver in the latter.

The financial markets’ expectations remain that the ECB will begin lowering its key interest rates in June. Since the last Governing Council meeting, yields on euro area government bonds have remained at similar levels, while yields in segments of the private sector have actually fallen here and there, on account of a decline in the risk premium demanded by investors when purchasing bonds of private-sector issuers. This was aided by the broad conviction on the financial markets that the euro area economy will gradually recover, supported by the easing financing conditions brought by the anticipated cuts in key interest rates. Share indices rose again in March, with the banking segment prominent.

On the basis of this data and the expectations with regard to ongoing developments in key aggregates, the Governing Council of the ECB decided to leave its key interest rates unchanged. Our assessment is that the current interest rate levels are making a substantial contribution to reducing inflation to its 2% target rate. Our next steps will continue to be decided on a meeting-by-meeting approach. Here our future analysis of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission will remain key. Should this support our assessment that inflation is converging to the target in a sustained manner, it would be appropriate to begin easing the restrictive monetary policy stance.