Response of Governor Boštjan Vasle following the ECB’s monetary policy meeting

In his response to the measures adopted yesterday by the ECB, the Governor of the Bank of Slovenia Boštjan Vasle explained that those measures provide strong stimulus, through which the members of the Governing Council of the ECB maintain favourable financial terms, and thus contribute to economic activity and the resulting rise in price pressures and the convergence of inflation with the target level.

Macroeconomic conditions

Economic situation deteriorated during the first half of the year, while according to our assessment, low growth in activity and prices will continue in the coming months. The main reason for stagnating growth lies in the tightening of measures that are slowing international trade and that, in addition to slowing growth in China and the effects of the Brexit, poses the greatest risk for the further deterioration in economic activity. Contributing most to slower price growth, in addition to slowing activity, are falling energy prices.

There are, however, elements of the economy where trends remain favourable. Primarily the service sector remains strong, while favourable trends continue on the labour market, both in terms of rising employment and wage growth. These are also areas where expectations regarding future trends remain high.

Slovenia, which remains strongly linked to the euro area, does not deviate significantly from trends in the euro area overall: economic growth is gradually slowing but in the context of considerably higher growth in activity and prices.

Monetary policy response

At yesterday’s meeting of the Governing Council, the members of that body decided that an economic policy response was required to halt the deteriorating situation. To that end, they emphasised that the coordinated response of all policies is required, given the factors that affect low price growth, expected trends and previously implemented monetary policy measures. “To ensure the greatest possible effectiveness of the measures adopted yesterday, the members of the Governing Council of the ECB call for the more decisive implementation of fiscal policy and structural measures,” said the Governor of the Bank of Slovenia Boštjan Vasle with respect to yesterday’s decisions.

He explained that a more accommodative monetary policy stance was adopted to ensure the convergence of inflation with a level understood to mean stable price growth. To that end, a comprehensive package comprising the following six measures was adopted yesterday:

1. the cutting of the interest rate on deposits placed with the Eurosystem by commercial banks

2. the restarting of the securities purchase programmes

3. the continued reinvestment of all due principal payments from previously purchased maturing securities

4. a change to the conditions of the next series of targeted longer-term refinancing operations

5. guidelines regarding the future monetary policy stance

6. the introduction of a two-tier system for reserve remuneration.

Mr Vasle explained that, “Such a combination, in addition to the cutting of short-term interest rates, also affects longer-term interest rates. A change in the future monetary policy stance will also contribute to a more sustained decrease in the overall yield curve.”

“Members of the Governing Council of the ECB made the aforementioned change by ensuring that interest rates will remain at previous levels or will be further cut, as necessary, until inflation forecasts converge robustly with our target, i.e. inflation close to but below two percent over the forecast horizon, and until that convergence is reflected in inflationary trends, as well," explained the Governor, who added, “The purpose of the change is to replace the current system, in which interest rates were set for a selected period, with a system in which interest rates are set with respect to the inflation rate."

In the context of a further cut in interest rates, the members of the Governing Council also decided to introduce a system in which a portion of the excess reserves of banks will be exempt from remuneration at a negative interest rate. According to Governor Vasle, the purpose of the aforementioned change is to preserve the effects of the other measures across the banking system.