Governor’s statement following the ECB’s monetary policy meeting
Economic activity in the euro area had regained its pre-crisis level by the end of last year. After a slowdown in growth heading into the new year, caused by a sharp rise in case numbers, developments over the remainder of the year are expected to be favourable. The financial markets are primarily reflecting the expectations of a faster shift away from an accommodative stance by central banks, and interest rates have risen slightly in consequence. In a situation of surplus demand and strong price pressures in the international environment, inflation in the euro area has reached its highest level for many years. It is forecast to slow over the following quarters, but this forecast is accompanied by a growing risk that it will remain elevated for some time.
Under these circumstances, following yesterday’s meeting of the Governing Council of the ECB, we are continuing the approach set out in December to the gradual scaling-back of asset purchases. We nevertheless leave open the possibility of responding quickly to any change in the situation.
The euro area economy is continuing to recover following the pandemic. Real GDP in the final quarter of last year was up 4.6% in year-on-year terms, thereby regaining its pre-crisis level. Economic growth has slowed slightly in recent months, owing to disruptions to global supply chains, high energy prices and the deteriorating epidemiological picture, but despite the great uncertainty our assessment is that economic growth will strengthen again over the remainder of the year. Notwithstanding the temporary slowdown in economic growth, the assessment is that the ongoing economic recovery from the pandemic is not under threat, and growth is forecast to strengthen again over the rest of the year.
In a situation of uneven recovery in supply and demand, and amid strong cost pressures, inflation in the euro area is persisting at elevated levels. From a previous high in December, it rose further to set a new record of 5.1% in January. The rise in energy prices and the continuing bottlenecks in supply chains suggest that inflation might remain at elevated levels for longer than expected, although a slowdown over the course of this year is still anticipated. Although the strong energy price inflation remains the largest factor in high inflation, the broader inflationary pressures have also strengthened.
There is increased volatility on the financial markets, but it remains within the bounds of expectations in light of the shift away from an accommodative monetary policy. Borrowing costs for the government sector and the private sector rose again, while share prices fell in January of this year. Euro area financial markets have continued to function well, and liquidity is satisfactory. The latest data for the performance of euro area banks also reveals that bank interest rates for households and businesses remain low, while lending activity is encouraging, which is supporting the chances of further economic recovery. Similar trends are evident in Slovenia. The required yield on 10-year Slovenian government bonds is just under 0.60%, around 40 basis points more than in mid-December. This rise is similar to those seen in other euro area countries.
Under these circumstances, following yesterday’s meeting of the Governing Council of the ECB, we are continuing the approach set out in December to the gradual scaling-back of asset purchases. In line with the December decisions, net purchases under the pandemic programme will be discontinued at the end of March of this year. At the same time monetary policy needs to maintain a sufficient measure of flexibility, to respond promptly to any sign of long-lasting inflationary pressures. The Governing Council therefore stands ready to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term.