Governor’s statement following the ECB’s monetary policy meeting, with commentary on the current situation

The mood at yesterday’s meeting of the Governing Council of the ECB reflected the slight improvement in the global and domestic economies, the persistently high headline inflation and, in particular, core inflation, and the effectiveness of the rises to date in key interest rates and their transmission into the banking system.

In these circumstances the Governing Council of the ECB opted yesterday for further action, and raised key interest rates at the seventh consecutive monetary policy meeting, this time by 25 basis points. The decision was also taken provisionally to discontinue the reinvestments of maturing principal under the APP as of July of this year.

As before, the next steps will depend on the situation at the time, in particular on the economic and financial data, developments in core inflation, and the effectiveness of our measures. The future decisions will ensure that monetary policy will be brought to levels sufficiently restrictive for as long as it takes to achieve a timely return of inflation to its target. Here it is important that the fiscal policy measures to protect the economy against high energy prices are temporary, and do not contribute to inflationary pressures that would require a more decisive response from monetary policy.

Amid an improvement in the global and domestic economic situation, economic growth in the euro area strengthened slightly in the early part of this year. After stagnating at the end of last year, euro area GDP in the first quarter of this year was up 0.1% in year-on-year terms, thus confirming the expectations of the March forecasts. The available monthly indicators point to a further strengthening of growth in the second quarter, with services the main driver amid the continuing weakness of manufacturing. The labour market remains tight, in reflection of the record low unemployment, the large shortage of workers, and strengthening wage growth.

Inflation in the euro area remained elevated in April at 7%. The main drivers were high food price inflation, and elevated core inflation of 5.6%. The easing of pressures along price chains saw growth in prices of food and non-energy industrial goods slow slightly in April, but service price inflation continued to strengthen in the wake of continuing growth in demand for services and increased wage growth. The main risk of higher inflation comes from the continuing pass-through of past cost pressures, the potential for wage growth and rises in profit margins that exceed expectations, and a sustained increase in inflation expectations.

The uncertainty on the financial markets in connection with the banking sector eased in the euro area. The stable economic outlook for the euro area and concerns over high inflation were to the fore. Expectations of further monetary policy tightening by the ECB consequently began to rise again, which drove a rise in government bond yields in all euro area countries, which nevertheless remain below their levels of early March.