Monetary policy meeting of the Governing Council of the ECB: statement by Governor Boštjan Vasle

The outbreak of the coronavirus has caused a sharp decline in economic activity throughout the euro area, including Slovenia. New forecasts of economic developments, which were confirmed yesterday by members of the Governing Council of the ECB, envisage a drop in economic activity in the main scenario comparable to the financial crisis ten years ago. Thus, at the recent monetary policy meeting, the members of the Governing Council adopted additional monetary policy measures aimed at supporting the economic recovery and ensuring price stability.

Due to pronounced uncertainty, the ECB’s main forecast is accompanied by two additional scenarios. The assumptions differ primarily in terms of the duration of the pandemic and a potential second wave. According to the main scenario, economic growth will contract by 8.7% in the euro area this year. That drop will be comparable to the medium-term contraction in economic activity following the great financial crisis in 2008/2009. Banka Slovenije will present forecasts relating to Slovenia in the coming days.

The situation on the financial markets, which were hit very hard in March in particular in the adverse conditions, is gradually stabilising and showing the first signs of improvement. Required yields for borrowing on the capital markets have fallen considerably in the euro area, including yields on Slovenian government bonds, but remain at levels higher than before the outbreak of the epidemic. Share indices are rising again, but remain highly volatile as the result of uncertainty and fear of a renewed deterioration in conditions.

In this situation, the governors of national central banks judged that there is a need for additional monetary policy stimulus to support the economic recovery and to continue to ensure medium-term price stability.

To that end, they further expanded the Pandemic Emergency Purchase Programme (PEPP), which was introduced in March this year, by EUR 600 billion. The purpose of that programme is to provide liquidity support to preserve the smooth functioning of money markets and lending activity. In this way, we are making room to improve conditions for bank lending for all segments of the economy, in particular households and corporates.

We also expect the aforementioned measure to ease borrowing costs in Slovenia, which has recently been among those countries with the highest growth in those costs. Similar to the euro area overall, additional measures in Slovenia are creating further space for improving bank lending conditions for households and corporates. This also applies to small and medium-sized enterprises, which represent an important element of the Slovenian economy, as they do not seek financing on the capital market, but for the most part via banks.

At the end of the meeting, the governors expressed their expectations regarding fiscal policy. We welcomed the European Commission’s initiative regarding a specific-purpose recovery fund, aimed primarily at providing aid to regions and sectors hit hardest by the pandemic. According to Banka Slovenije, this means a considerable substantive shift in thinking about the financing of certain tasks in connection with the current health situation in EU Member States.