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

In the second quarter of this year, the euro area, and in particular Slovenia, recorded a strong recovery in economic activity. Despite the high risks associated with the future course of the epidemic, this is continuing in the third quarter. There was also a strengthening of inflation, although we anticipate that following a gradual rise up to the end of the year, it will start easing off in the coming year. With the continued support of monetary policy, conditions in the financial markets continue to look highly favourable.

In this situation, the members of the ECB Governing Council decided yesterday to maintain our accommodative monetary policy stance, thereby continuing to ensure ample liquidity and favourable financing conditions for the banking sector, the non-banking sector and the governments of the Eurosystem. Here the scope of pandemic purchases of securities will be slightly lower than the temporarily increased purchasing levels in the second and third quarters.

With progress in vaccinations and consequently an easing of measures to contain the spread of the virus, the economic recovery in past months has markedly picked up pace both in the euro area and in Slovenia. We have observed a strong rebound in economic activity for services, and also despite the negative effects of bottlenecks in the supply chains, there has been continued growth in manufacturing. In the euro area, real GDP grew in the second quarter by 2.2%, which is notably greater than previous expectations, and has narrowed the lag behind the pre-crisis level by 2.5%. At the same time, the favourable values of high-frequency indicators suggest that despite the continued presence of the epidemic risks, the high economic growth should continue in the third quarter.

The latest forecasts, which were discussed yesterday by the Governing Council, also point to an improved macroeconomic outlook. Real growth in GDP for the euro area is forecast at 5% for 2021, while growth is expected to gradually ease off at 4.6% and 2.1% in 2022 and 2023 respectively. Compared to June, the new forecast therefore envisages a higher level of economic activity throughout the period, with the pre-crisis level already being reached by the end of this year. Due also to the continuing support of monetary and fiscal policy, economic growth will stem principally from factors of domestic demand, among which growth of private consumption will play a key part. At the same time, based on the somewhat more optimistic outlook for key trading partners in the euro area, the outlook for growth in foreign demand were significantly upwardly revised.

Inflation, which amounted to 3% in August in the euro area, should strengthen somewhat up to the end of the year, then we anticipate a gradual reduction below the ECB’s inflation target of 2%. This year’s growth in prices, which on an annual level should reach 2.2%, is to a large extent being driven by temporary inflationary pressures, for which we anticipate that they will disappear at the beginning of the coming year. These pressures derive mainly from the rapid growth in energy products in connection with last year’s low base, from the expiry of the reduction in VAT in Germany during the epidemic, from the delay to the summer sales last year, and partly from price pressures stemming from disruptions in the supply chains. In 2022 and 2023, inflation is expected to amount to 1.7% and 1.5% respectively, although long-lasting disruptions to the supply chains could be reflected to a larger extent in a more pronounced growth in wages and broader inflationary pressures.

With the continued support of a very accommodative monetary policy, conditions in the financial markets continue to look favourable. The costs of borrowing for individual Member States are at levels similar to those prior to the outbreak of the pandemic. Numerous countries, including Slovenia, can borrow with ten-year maturity at interest rates close to zero percent. The conditions of financing banks and companies in capital markets remain very favourable. Share indices have hit new record highs.

Based on the above, and with a focus on the medium-term attainment of a new symmetrical inflation target of 2%, the Governing Council has retained the accommodative monetary policy measures. For this reason, we have retained all the measures to date, and taking into account the improvement in economic prospects and favourable conditions on financial markets, we have decided that we can maintain the favourable conditions of financing through slightly lower net purchases under the PEPP compared to the previous two quarters.

The ECB’s monetary policy will thus continue to ensure ample liquidity and favourable financing conditions for the banking sector, the non-banking sector and euro area governments. In this way, we are supporting continued economic recovery from the epidemic, and are consequently creating the conditions for the sustainable attainment of stable growth in prices in the medium term.