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

Economic activity in the euro area strengthened in the early part of this year, while inflation continued to fall. The latest projections suggest that these developments will continue over the following years. We have therefore decided to cut interest rates by 25 basis points, after nine months of holding them steady. Our future decisions remain dependent on the incoming data and the inflation outlook.

At yesterday’s meeting the members of the Governing Council decided that the moment to moderate the degree of monetary policy restriction had arrived. We lowered our key interest rates by 25 basis points, following nine months of holding them steady. In maintaining the right monetary policy stance, we are determined to ensure that inflation returns to its 2% medium-term target in a timely manner. The next steps will continue to depend on the situation as it stands at the time, in particular on incoming economic and financial data, developments in core inflation, and the effectiveness of our measures. This means that we are not pre-committing to a particular rate path.

Our decision is based on the macroeconomic data, which shows a recovery in economic activity and an ongoing gradual fall in inflation. In light of the macroeconomic data, the latest projections, which we were briefed on yesterday, show the economic recovery continuing this year amid robust private consumption. GDP growth will stand at 0.9% this year, and is forecast to strengthen to 1.4% in 2025 and 1.6% in 2026 amid growth in real household income and the continuing recovery in foreign demand. Inflation will initially remain stubborn, averaging 2.5% this year, before falling further to 2.2% in 2025 and 1.9% in 2026 as external cost pressures ease. The pace of the fall in inflation will largely depend on the developments in core inflation, service price inflation in particular, and on growth in labour costs.

The financial markets have seen a slight rise in yields on government and private-sector securities in the euro area over the last two months. The markets are expecting a slightly more gradual approach to cutting the ECB’s key interest rates after June, as they judge that inflation could fall slightly more slowly amid the economic recovery in the euro area. The risk premiums demanded by investors when purchasing bonds remained low, despite the rise in yields. This has partly compensated for the restrictiveness brought to the financial markets by rising yields, but at the same time has supported the homogenous monetary policy transmission needed to return inflation to its 2% medium-term target level as quickly as possible. Share prices have risen since the April meeting of the Governing Council, which reflects the positive mood of investors with regard to the economic outlook.