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

After favourable developments in the first half of the year, the economic outlook for the euro area for the remainder of the year is worsening markedly, while inflation remains at high levels. In these circumstances, the Governing Council yesterday opted for further monetary policy action. We raised our key interest rates for the third meeting in a row, again by 0.75 percentage points on this occasion. Monetary policy normalisation was also continued via other instruments. We made changes to (a) the interest rates applicable to the TLTRO-III, thereby reinforcing the transmission of key monetary policy interest rates into bank lending conditions for the private sector, and (b) the remuneration of minimum reserves, thereby ensuring the neutrality of the instrument, and aligning remuneration more closely with market conditions.

The Governing Council of the ECB yesterday decided to continue its decisive normalisation of monetary policy. We raised all three key ECB interest rates by 75 basis points, thus making significant progress to the withdrawal of accommodative monetary policy. Further interest rate hikes are anticipated, with the size of the rises depending on the evolving outlook for inflation and the economy, under a meeting-by-meeting approach. The interest rate hikes and their impact on the financing conditions will prevent current inflation expectations from extending over the medium term. The Governing Council’s aim is to stabilise inflation at 2% over the medium term.

To reinforce the transmission of key interest rates into bank lending conditions to the private sector, and thus to continue the coordinated normalisation of monetary policy via all instruments, an adjustment was made to the interest rates applicable to the TLTRO-III. The change to the terms and conditions will apply from 23 November 2022, and banks will also have additional dates for voluntary early repayments.

We also made changes to the remuneration of minimum reserves, with the aim of ensuring the neutrality of the instrument, and aligning remuneration more closely with market conditions. Minimum reserves will be remunerated at the deposit facility rate.

These decisions were adopted on the basis of the latest data. The euro area economy is cooling in the second half of the year. The turmoil on the energy markets as a result of the ongoing Russian military aggression against Ukraine, soaring inflation, and the heightened uncertainty are continuing to reduce confidence among consumers and firms, and are adversely affecting the economic sentiment. Survey indicators show that the slowdown in activity has become more broadly based in recent months, with economic activity slowing in manufacturing and in services.

Inflation in the euro area hit 9.9% in September, and remains broadly based. With energy and food prices continuing to rise sharply, core inflation, which is more under the influence of domestic inflation factors, is also rising. The share of the HICP consumer basket that is recording price rises of more than 5% had reached fully 60% by September. Under these conditions, and given the continuing strong pressures along price chains, the risk of inflation persisting at high levels for longer is increasing. 

The situation on the financial markets continues to reflect the normalisation of the monetary policy of the Eurosystem and other major central banks. This has been reflected in a further rise in risk-free interest rates on the money markets, and in higher borrowing costs in the public and private sectors. Yields on euro area government and corporate bonds have consequently risen: the yield on 10-year Slovenian government bonds stands at 3.4%, while the yield on 10-year German government bonds stands at 2.1%. Prices of higher-risk financial instruments such as shares and corporate bonds have fallen since the September meeting of the Governing Council, and yields have risen. The monetary policy normalisation is also gradually raising interest rates for firms and households.