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

Economic growth in the euro area will slow from 3.4% this year to 0.5% next year, before rising again to 1.9% and 1.8% over the next two years. The projections, which members of Governing Council of the ECB were briefed on yesterday, also assume that inflation will remain close to its current level for several months. It will then begin to gradually decline, but the decline over the entire projection horizon will be slower than forecast even in the autumn.
In light of these projections, the Governing Council yesterday opted for further action. We raised our key interest rates for the fourth meeting in a row, by 0.5 percentage points on this occasion. Monetary policy normalisation was also continued via other instruments., and the framework for reducing the portfolio of securities purchased in previous years was outlined.  

The Governing Council decided to raise all three key ECB interest rates by 50 basis points. Given the substantial upward revision to the inflation outlook, our expectation is that interest rates will have to rise further before hitting a level that is sufficiently restrictive to ensure that inflation returns as quickly as possible to its 2% target over the medium term. 

Yesterday’s discussions also addressed how to normalise the monetary policy securities portfolios. The decision was taken that as of the beginning of March 2023 we will no longer reinvest all principal payments from maturing securities under the APP. The APP portfolio will be reduced at a measured and predictable pace. The decline will amount to EUR 15 billion per month on average until the end of the second quarter of 2023. The subsequent pace of reduction will be determined over time, to ensure it remains consistent with the overall monetary policy strategy and stance, to preserve market functioning, and to maintain firm control over short-term money market conditions. By the end of 2023 we will also review the operational framework for steering short-term interest rates, which will provide information regarding the endpoint of the balance sheet normalisation process. The principal payments from maturing securities under the PEPP will be reinvested until at least the end of 2024.

The latest forecasts discussed by the members of the Governing Council at yesterday’s meeting suggest that economic growth in the euro area will be lower next year than previously forecast, while inflation will be higher over the projection horizon. According to the core projection, economic growth will slow from 3.4% this year to 0.5% next year, before strengthening again to 1.9% in 2024 and 1.8% in 2025. 

Inflation is expected to persist close to the current levels for some time yet, before beginning to fall more significantly next year under the assumption of the stabilisation of the energy markets, the elimination of disruptions to supply chains, and the normalisation of cost pressures, but will remain higher over the entire projection horizon than forecast in the autumn. Inflation is forecast to hit 8.4% this year, before easing to 6.3% in 2023, and then 3.4% in 2024 and 2.3% in 2025.

Banka Slovenije will present the projections for Slovenia today.