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

The members of the ECB Governing Council deliberated yesterday over the new economic trend forecasts for the euro area, which are marked principally by the consequences of the Russian military aggression. That aggression lowered expectations regarding economic growth this year and for the coming two years, which will remain relatively favourable but will involve higher inflation forecasts.

In these circumstances the ECB Governing Council has decided to continue the normalisation of monetary policy. The adopted decisions are tied to (i) the conclusion of net purchases of securities under the APP, (ii) the finding that the conditions have been met under the forward guidance policy and (iii) the intention to raise interest rates in July. At the same time we will ensure that inflation stabilises at its 2% target over the medium term.

The Russian military aggression in Ukraine and the tightened epidemic measures in China are generating persistently high prices of raw materials and energy, and a continuation of hold-ups in supply chains. Consequently the euro area is seeing continued stagnation in the growth of economic activity, and increased inflationary pressures. Inflation in the euro area stood at 8.1% in May, and once again reached its historically highest level.

The continuation of uncertain conditions is also reflected in the latest forecasts, which ECB Governing Council members discussed in yesterday’s meeting. Economic activity is thus expected to increase by 2.8% this year, and in the coming two years we anticipate conditions in supply chains to improve, while a robust labour market, accumulated savings and significant fiscal support will enable the stabilisation of economic growth at 2.1%. At the same time we also expect inflation to persist at the higher level for some time. Due to the high prices of energy products and food, inflation this year will amount to 6.8%, and will far exceed core inflation, which will be 3.3 percent. With the anticipated stabilisation of inflationary pressures, both rates should gradually once again approach our 2-percent target by 2024.

Since the last ECB monetary policy meeting in April, conditions for financing in the market have been further tightened, although not due to increased uncertainties but principally due to the more restrictive monetary policies of central banks seeking to stabilise inflation. Share prices have fallen, and the required yields on bonds have grown drastically. Since the beginning of the year, the costs of government borrowing in the euro area have risen more than 1 percentage point. Investors are demanding an approximately 2-percent yield for 10-year Slovenian government bonds, while the yields at the beginning of the year still stood at 0.4%. The required yields for 10-year German bonds have grown since the beginning of the year from around 0% to 1.2%. In the first few months of 2022, interest rates on bank loans to households and non-financial corporations started to rise across the euro area, but viewed historically their levels are still very low, although lending remains robust.

Based on the latest economic trends and new forecasts, the ECB Governing Council has decided to continue the normalisation of monetary policy:

First: We took the decision to end net purchases of securities under the APP on 1 July, but the framework for reinvesting will remain unchanged.

Secondly: We have determined that the conditions are in place for forward guidance that allow interest rates to be raised. In line with this we intend to raise our key interest rates in July by 25 basis points. Here we anticipate the further raising of interest rates in September, with the level of the rise depending on medium-term inflation outlooks. If the outlooks are maintained or deteriorate, a higher increase in interest rates will be called for in September.

Third: We took the position that a gradual but sequential raising of key ECB interest rates will also be appropriate after September.

At the same time we will ensure that inflation stabilises at its 2% target over the medium term.