Governor’s statement following the ECB’s monetary policy meeting

With what is now a more favourable epidemiological outlook, members of the Governing Council of the ECB deliberated yesterday over the improved economic forecast for the euro area. For this year, we expect a strong acceleration in economic activity, and the high growth rate will continue into the coming year. At the same time, despite this year’s acceleration, inflation will remain below the desired level. Conditions on the financial markets remain stable.

These conditions are tied largely to our far-reaching policy measures. For this reason, the Governing Council has decided to retain all the measures put in place to date. The fact is that extensive support through monetary and fiscal policies is needed in order to maintain favourable conditions of financing and consequently to ensure a solid recovery and sustainable attainment of inflation close to our target.

With successful vaccination programmes, the epidemiological outlook in Europe is improving, and preventive measures to contain the spread of the virus are being eased. This is reflected in the macroeconomic picture: there is continued robust recovery in manufacturing, while in the services sector we have observed an acceleration in activity for the first time since the outbreak of the pandemic. High-frequency data thus indicate that in the second quarter, after two successive quarters of slight contraction in economic activity, we can expect a sharp acceleration in economic activity.

The latest forecasts, which were discussed yesterday by the Governing Council, have economic growth reaching 4.6% this year. We also expect a similarly high growth of 4.7% in the coming year. In 2023 certain fiscal measures will expire, and the recovery period will be over, while growth will slow down somewhat to a level of 2.1%. GDP is expected to return to its pre-crisis level in the first quarter of 2022. Economic activity will be supported principally through factors of domestic demand, specifically through more generous fiscal measures and the recovery of private spending following the withdrawal of containment measures.

The increased domestic spending will also boost inflation slightly compared to 2020. Due to temporary factors such as the adjustment of oil prices relative to the previous year, the change in the weighting and the effect of raising VAT in Germany, inflation will jump to 1.9% in 2021. When these temporary and mainly supply-side factors fade, in the main scenario we expect inflation once again to fall slightly. In 2022 and 2023, we therefore anticipate growth of 1.5% and 1.4% respectively.

Such expectations are still accompanied by high risks, which for economic growth are now spread more evenly, while for inflation slightly higher growth in prices is expected.

Banka Slovenije expects to present new forecasts of economic trends relating to Slovenia in the coming days.

Conditions on the financial markets remained favourable in the last month. In May, there was some growth in the required yields for government borrowing, which was mainly the result of the improved macroprudential outlook in the euro area. The costs of borrowing in the private sector remain low. The cost of Slovenian borrowing on capital markets, together with other government bonds, increased, but nevertheless remains low: for ten-year maturity it increased from 0% to 0.16%, which is a yield comparable to that for Belgium and France.

The recovery of the euro-area economy from the pandemic is still in the early stage, and at the same time is still accompanied by high risks associated with the development of the epidemic and consequently macroeconomic trends. For this reason, the members of the Governing Council decided that for the third quarter we would maintain unchanged the scope of pandemic purchases of securities, i.e. at the raised levels of the second quarter. This scope of purchases will serve to additionally support the recovery, and will place it on more solid foundations, while at the same time ensuring a continuance of the favourable financing conditions, where we will also maintain all the necessary flexibility.