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

Inflation in the euro area is continuing to fall, but economic activity also seems to be slightly weaker than expected. Under these circumstances, at its meeting held in Brdo pri Kranju the Governing Council of the ECB took the decision to make its third interest rate cut of the year, in the amount of 25 basis points. For future meetings we are not pre-committing to a particular rate path, but will instead determine our next steps on a meeting-by-meeting basis.

At yesterday’s meeting of the Governing Council of the ECB, which was held in Brdo pri Kranju at the invitation of Banka Slovenije, the decision was taken to again cut the key interest rates by 25 basis points, following the cuts made in June and September. Future decisions will continue to ensure that the monetary policy stance is appropriate to achieving a timely return to the medium-term inflation target of 2%. The next steps will continue to depend on the situation as it stands at the time, in particular on incoming economic and financial data, developments in core inflation, and the effectiveness of our measures. This means that we are not pre-committing to any particular rate path, but will take decisions regarding the level of interest rates on a meeting-by-meeting basis.

The indicators of economic activity are slightly weaker than expected. The composite PMI for the euro area stood at 49.6 points in September, having moved into the zone of contraction for the first time since February, in reflection of the ongoing decline in manufacturing activity, and slower growth in services. The labour market is showing signs of a gradual slowdown in demand for labour, but unemployment remains at a record low amid soaring labour costs. Meanwhile inflation is continuing to fall in the euro area. Inflation fell by a further 0.5 percentage points to 1.7% in September, in reflection of a sharp decline in energy price inflation and a gentle slowdown in core inflation. The latter stood at 2.7% in September, and continues to be sustained at this elevated level by high service price inflation of 3.9%. Our expectation is for inflation to temporarily rise once again over the remainder of the year, before slowing towards its target level over the course of next year.

Yields on euro area government bonds fell at short maturities, with the markets expecting slightly faster cuts in the ECB’s key interest rates on account of further signs of a slowdown in the euro area economy. The market inflation expectations have mostly been declining since the summer. European share indices rose, amid volatility that is still slightly elevated. The risk premiums demanded by investors when purchasing private-sector bonds fell slightly. The situation on the financial markets thus remains supportive to effective monetary policy transmission.