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

The euro area has seen high economic growth this year, and will recover its pre-crisis level of economic activity in the first quarter of next year. After a slight slowdown, the economy will remain in good shape next year. Inflation will remain elevated this year and next year, but is expected to close on its target level of 2% by the end of the projection horizon. The risks surrounding the economic outlook are large but evenly distributed, and will depend primarily on developments in energy prices and conditions in supply chains.

In these circumstances the Governing Council decided yesterday to gradually scale back the pandemic measures. This decision encompasses a step-by-step reduction in asset purchases, while leaving open the possibility of responding quickly to any change in the situation.

At our latest meeting the members of the Governing Council of the ECB took several decisions with regard to future asset purchases:

• Net purchases under the PEPP will be conducted at a lower pace in the first quarter of 2022 than in the previous quarter, and will be discontinued at the end of March 2022. The reinvestment horizon for principal payments of maturing securities under the PEPP will be extended until at least the end of 2024. This will ensure all of the requisite flexibility in the aforementioned programme, should it be necessary to address fragmentation in the euro area related to the pandemic. Even after the PEPP is ended in March of next year, we will be ready to resume net purchases should it be necessary to counter negative shocks related to the pandemic.
• Monthly net purchases under the APP will be paced at EUR 40 billion in the second quarter, and EUR 30 billion in the third quarter, while from October they will be maintained at EUR 20 billion for as long as necessary to reinforce the accommodative impact of our key interest rates.

The Governing Council will also continue to closely monitor the financing conditions faced by the banks, and their liquidity position, and through the existing TLTRO III will continue providing funding at favourable cost to support bank lending to businesses and households. Our expectation is that the period of special conditions applicable under the TLTRO III will end in June of next year. We will also assess the appropriate calibration of the two-tier system of reserve remuneration.

Our decisions were based in part on the latest projections. Their key message is that economic consequences of the pandemic are diminishing in the euro area, and higher economic growth can thus be expected this year and next year, together with a very buoyant labour market. Economic growth is forecast at 5.1% for this year, and 4.2% for next year. Economic activity in the euro area will regain its pre-crisis level in the first quarter of next year.

The high energy prices, the disruptions to global supply chains and the strong demand are also driving inflation, which reached 4.9% in the euro area in November, its highest level since records began.

Inflation will remain elevated for some time in 2022 (and will average 3.2% over the year). When the aforementioned factors wane, inflation is expected to close on its target level of 2% by the end of the projection horizon.

The risks surrounding the economic outlook are large but evenly distributed, and will depend primarily on developments in energy prices and conditions in supply chains.