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

The slowdown in economic activity in the euro area continued in the final quarter of last year, but was not as sharp as expected. Data indicate that the aforementioned slowdown will be less pronounced again this year. Inflation eased slightly in the final three months of the year but remains high, as does core inflation. Improved outlooks regarding economic activity and interest rate hikes by major central banks are reflected on the financial markets.
In these circumstances, the Governing Council of the ECB opted yesterday for further action, and raised key interest rates at the fifth consecutive monetary policy meeting, once again by 0.5 percentage points. It also expressed its expectations that interest rate hikes will continue, with another 0.5 percentage point hike in March. Monetary policy normalisation was also continued via other instruments.

The Governing Council decided to raise all three key ECB interest rates again, by 50 basis points. Given persisting inflationary pressures, the Governing Council of the ECB expects to raise interest rates again by 50 basis points at its next meeting in March. Interest rates, on a restrictive level, will simultaneously lower inflation, as they will curb demand and mitigate the risk of rising inflation expectations. Further monetary policy decisions will be adjusted to current conditions and expectations.

The normalisation of other monetary policy instruments will also continue. As announced in December 2022, the Governing Council will reduce the scope of purchases in the APP at the beginning of March. The average monthly reduction will amount to EUR 15 billion until the end of the second quarter of 2023. That reduction will be carried out proportionally with regard to maturity under individual programmes in the scope of the APP. Favour will be given to more climate-oriented issuers in the reinvestment of purchased corporate bonds.

Today’s decisions were adopted on the basis of data that indicate economic growth in the euro area is cooling, but remains more robust than previously expected given recent economic development. Euro area GDP rose by 0.1% in quarter-on-quarter terms in the final quarter of last year, despite an expected decline, while January’s soft indicators of economic activity point to more favourable outlooks at the beginning of this year, as well. The probability of a recession in the euro area is thus falling significantly. In the context of the continuing war in Ukraine and slowing global economic growth, uncertainty regarding future outlooks for the euro area remains elevated, but is more equally distributed.

Inflation was 8.5% in the euro area in January (according to Eurostat’s preliminary estimate), marking the third consecutive month of decline. The latter was almost exclusively the result of sharply lower growth in energy prices, which was a reflection, inter alia, of more favourable conditions on European energy markets, in the context of which natural gas and electricity prices were down notably. Core inflation, which excludes food and energy prices, was unchanged in January, at 5.2%, and continues to indicate persistent, more broadly based inflationary pressures. Significant uncertainty regarding the continuation of inflation trends is linked in particular to rising food prices and developments in wages, the growth of which has accelerated in recent months.

On the financial markets in early 2023, short-term interest rates gradually adjusted to expectations that the ECB will continue with interest rate hikes. Longer-term interest rates, on the other hand, remained relatively unchanged. The premiums on euro area government bonds over benchmark German government bonds fell, as did premiums on the yield of bonds of private issuers, while the values of share indices were up. Developments on the financial markets reflected the improved mood of investors in the context of improving economic forecasts for this year.