Governor’s statement following the meeting of the Governing Council of the ECB: higher pace of securities purchases to ensure favourable financing conditions
As the recovery strengthens in the second half of the year, economic growth in the euro area will reach 4% this year, although the risks remain high. Despite the recovery, price pressures will remain weak: inflation will stay below its medium-term target, reaching 1.4% at the end of the projection horizon. The members of the Governing Council were in complete agreement that ensuring favourable financing conditions for the banking sector, the non-banking sector and Eurosystem governments by maintaining a highly accommodative monetary policy is the key in this situation.
The key decision at the latest meeting related to the dynamics of purchases in the pandemic emergency purchase programme (PEPP); we decided to significantly increase the pace of purchases in the next quarter, while leaving the total envelope unchanged.
Economic activity in the euro area and in Slovenia in the final quarter of last year was much higher than in the second quarter, despite the worse epidemiological picture and comparable containment measures. The initial figures for the beginning of this year also confirm the recovery, as the decline in economic activity driven by the struggles of the service sector is being mitigated by the robustness of the manufacturing sector, which is mainly being fuelled by solid foreign demand.
These dynamics are also reflected in the macroeconomic forecasts for the euro area drawn up under the aegis of the ECB. After declining further over the coming months, consumption will recover in the second half of the year once the containment measures are lifted as expected. Aggregate demand will also be raised by foreign demand, and economic growth in 2021 is expected to reach 4%. High growth is also expected in 2022 and 2023 (forecast at 4.1% and 2.1% respectively) as the health situation improves, and with it the economy.
Despite the recovery, spare capacity will remain in the economy, which will curb inflationary pressures. The rise in inflation, which is forecast to reach 1.5% this year, will first be driven mainly by rising energy prices, which have little to do with the domestic macroeconomic situation. Once these one-off effects dissipate, inflation will fall again, but inflationary pressures will nevertheless rise slightly as the economy recovers over the coming years. Inflation will thus reach 1.4% by 2023, remaining below its medium-term target of close to but less than 2%.
The long-term nominal yields on government bonds and private-sector bonds have risen slightly since the beginning of the year (yields on 10-year Slovenian government bonds have risen from -0.2% to 0% for example). Borrowing costs nevertheless remain at very low levels, even in the segment of higher-risk instruments. The key to successfully navigating the economic adversity is that the financing conditions remain favourable throughout the monetary policy transmission chain, from risk-free assets to loan terms for the non-banking sector, and for all sectors of the real economy, from the banking system to firms and households. We are taking a comprehensive and multifaceted approach to monitoring this.
In light of the above, and given the inflation trends in the Eurosystem, we remain committed to maintaining favourable financing conditions. The key decision from yesterday’s meeting was that our purchases within the framework of the PEPP in the next quarter will be significantly larger than in the first quarter of this year. The total envelope remains unchanged at EUR 1,850 billion.
In addition, the accommodative monetary policy stance will continue to be supported by other measures taken during the course of last year. This package of measures is providing favourable financing conditions for the banking sector and the non-banking sector, and for Eurosystem governments, thereby supporting economic activity and ensuring price stability over the medium term.