ECB monetary policy meeting: New forecasts for the euro area

Boštjan Vasle, Governor of the Bank of Slovenia, attended the ECB’s monetary policy meeting as normal, which was held in Frankfurt yesterday. Members of the Governing Council of the ECB were briefed on the latest economic forecasts, according to which economic growth in the euro area will remain moderate. Mr Vasle highlighted the change in the structure of the economic growth forecast in the euro area. It will largely be supported by domestic factors, in contrast to previous years. The momentum from the international environment continues to be weakened by numerous uncertainties. The Bank of Slovenia is expected to release the new forecast for Slovenia next week.

Compared with previous periods, economic growth in the euro area over the projection horizon will be driven more by domestic demand, which will be strengthened by accommodative monetary policy, and fiscal incentives in countries that still have fiscal space. The mood in services focusing primarily on the domestic market and in construction remains stable, while the labour market remains robust. The opposite is the case in the international environment, where uncertainties have declined slightly but nevertheless remain large, and relate primarily to frictions in global trade, a slowdown in the Chinese economy, and the Brexit process. The uncertainties are mainly depressing activity in sectors that are strongly integrated into international manufacturing chains.

The aforementioned uncertainties are also having an impact on inflation, which after falling significantly this year will slow to 1.1% next year, before approaching 1.6% by 2022. Core inflation is expected to gradually strengthen over the projection horizon, driven by the robust labour market, low unemployment and higher wages in the euro area, and higher profitability.

Mr Vasle also summarised the key factors in economic activity in Slovenia: “Similarly to the euro area, domestic factors are also the main engine of economic activity in Slovenia, while growth in foreign demand will be weak.” The Bank of Slovenia is expected to release the new forecasts during the next week.

The situation on the financial markets remains accommodative

Despite recent rises, the risk-free interest rate benchmarks remain significantly down on a year earlier. Bank lending is continuing to grow, interest rates on corporate lending are continuing to fall, and lending rates have reached new record lows for non-financial corporations and households alike. Monetary policy remains expansionary, thereby ensuring the conditions for convergence on the price stability target.

All the measures announced by the Governing Council in September have fully entered into force. Under the system for the two-tier remuneration of excess reserves, since the end of October banks have seen only part of their excess reserve holdings subject to negative interest. Banks across the euro area and in Slovenia have made almost full use of the opportunity for two-tier remuneration. “We also resumed public-sector and private-sector asset purchases in November, a measure that further underlines our commitment to maintaining a highly expansionary monetary policy until we reliably approach the inflation target of close to but below 2%,” explained Mr Vasle.

At this month’s meeting members of the Governing Council left the measures in their existing form, which will continue to provide support for economic activity, and convergence of the price stability target. They again called for a more active role to be played by other macroeconomic policies, which in the current, more uncertain situation have more pronounced positive effects, and could open up greater manoeuvring room for monetary policy. The plans for revising the Eurosystem’s monetary policy strategy were also made clearer. “We envisage the process beginning in January of next year, and being completed before the end of the year,” clarified Mr Vasle.