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

After some favourable shifts as we moved into this year, the Russian military aggression and the consequent sanctions imposed have worsened the economic outlook in the euro area and in Slovenia, most notably sharply increasing the risk of a long period of elevated inflation. In the financial markets, following a brief period of volatility the situation has once again stabilised.

In these circumstances the Governing Council has decided to continue the normalisation of the monetary policy adopted in previous meetings. We should underline here that we stand ready to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term.

After some favourable shifts as we moved into this year, the Russian military aggression and the consequent sanctions imposed have worsened the economic outlook in the euro area. While the high-frequency indicators of economic activity in March showed no shrinkage of economic activity, the situation in Ukraine has already brought about a pronounced deterioration in sentiment among households and companies. The indicators of consumer confidence have thus fallen to levels that were recorded during the first wave of the pandemic in Europe. Alongside the deterioration in sentiment and the consequent decline in demand, in the future economic activity could be negatively impacted by uncertainties over the supply of key energy products and the effect of the war on the availability of raw materials. Supply chain problems are indeed tightened up by the measures in Asia related to the pandemic.

Slovenia saw the economy continue to perform well in the early part of this year, following last year’s extremely high economic growth. According to currently available data, the increase in economic activity in the first quarter has continued, although the growth was lower than in the previous quarter. 

The outbreak of the Russian military aggression in February brought a sharp increase in the risk of a longer period of high inflation in the euro area. The rate passed 2.0% in July of last year, and due to the additional increase in the prices of energy, raw materials and food reached 7.5% in March of this year. Inflation is becoming increasingly broad-based, and this is reflected in the growth of core inflation, while concern is growing over the elevated inflation expectations.

Following a tightening of the financing conditions in the financial markets in light of the Russian military aggression, in recent weeks these conditions have eased once again. The prices of shares have grown and made up for a sizable part of the losses this year, while the premiums in the yields on bonds of more risk-prone countries of the euro area and private sector bonds have fallen, and once again approached the levels before the military invasion. Interest rates on bank loans in the euro area also remain at historically low levels, both for companies and households.

Given such trends the ECB Governing Council approved the continued gradual normalisation of monetary policy. At yesterday’s meeting we took the view that the latest data and trends are reinforcing our expectation that we will be ending the net buying of securities under the APP in the third quarter of this year. In conditions of high uncertainty we would underline that in the future we will continue to maintain various options regarding steps, flexibility and a gradual approach in our decision-making.

The members of the Governing Council stand ready to adjust all our instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term.