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

Economic activity is slowing in the euro area, while inflation is gradually easing but remains well above the ECB’s target rate. The latter is reinforcing the expectations of market participants regarding an extended period of high key central bank interest rates. In these circumstances the Governing Council of the ECB has decided, after ten consecutive meetings at which interest rates were hiked by a total of 4.5 percentage points, to leave the ECB’s key interest rates unchanged on this occasion. It should be reiterated that our next steps will remain dependent on the situation at the time.

The latest data indicates that the euro area economy continued to slow in the third quarter. Amid a decline in new orders, a run-down of inventories and tighter financing conditions, the situation remains most challenging in manufacturing, while the survey data has also been indicating a slowdown in services for several months now. The labour market remains resilient to the economic slowdown: the unemployment rate hit a new low of 6.4% in August. Inflation in the euro area slowed to 4.3% in September, in reflection of slowdowns in food price inflation, energy price inflation and core inflation. The risk of higher inflation nevertheless remains non-negligible, and comes primarily from the tight labour market, and the potential impact of geopolitical instability on energy price developments.

The past interest rate increases continue to be transmitted forcefully into financing conditions. The outbreak of war in the Middle East has had a limited impact on the financial markets so far. The risks of a deterioration in the geopolitical situation have been reflected most evidently in higher energy prices. Developments in other segments of the financial markets have mainly been shaped by the market participants’ expectations that key interest rates will need to remain high for some time to meet the inflation target. Yields on government bonds have consequently risen significantly at the global level, particularly at longer maturities. The corresponding rise in borrowing costs has driven an increase in risk premiums, which has been reflected in a fall in share prices and a rise in credit premiums in higher-risk financial segments.

Based on this information the Governing Council of the ECB has decided, after ten consecutive meetings at which interest rates were hiked by a total of 4.5 percentage points, to leave the ECB’s key interest rates unchanged on this occasion. Our assessment is that the latter are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to returning inflation to its target level in timely fashion. The next steps will continue to depend on the situation as it stands at the time, in particular on the economic and financial data, developments in core inflation, and the effectiveness of our measures. Accordingly our future decisions will ensure that interest rates are kept at sufficiently restrictive levels for as long as it takes for inflation to return to our 2% target in a timely manner.

Given the anticipated further slowdown of inflation in the euro area, the likelihood of inflation in Slovenia deviating from the euro area average is increasing. The difference in inflation rates is increasingly attributable to domestic inflation factors, including the comparatively high wage growth in Slovenia, and the higher domestic consumption. Maintaining the right stance in other economic policies, including fiscal and wage policies, will also be vital to addressing these differences. When measures are taken in the future, the key will be ensuring that they are complementary to monetary policy, and provide support for anti-inflation efforts.