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

According to the indicators available to date, the euro area continued to see modest economic growth in the second quarter, and headline inflation continued its fall in June, while core inflation remained unchanged and elevated. In light of this data, the Governing Council of the ECB decided to leave interest rates unchanged on this occasion, following the cut of 25 basis points in June. Our future decisions remain dependent on the incoming data and the inflation outlook.

The latest data shows modest economic growth continuing in the euro area in the second quarter. It was mainly driven by the ongoing growth in the service sector, while manufacturing is continuing to face a decline in orders. On the labour market, despite signs of a gradual slowdown in demand for labour, unemployment remains at a record low, while growth in labour costs remains high. According to the Eurostat flash estimate, year-on-year inflation in the euro area slowed again in June, to 2.5%, driven largely by low energy price inflation. Meanwhile core inflation remains unchanged at 2.9%, having been held at elevated levels by stubborn service price inflation, which has remained close to 4% since the end of last year. The high service price inflation continues to reflect the persistent domestic inflationary pressures, in particular the pass-through of elevated growth in labour costs into inflation.

Yields on government and private-sector bonds in the euro area have been slightly more volatile over the last month. The main factor was the uncertainty on the markets in connection with the results of the Europe and French elections. Yields rose temporarily, but then mostly returned to their levels from the beginning of June. The risk premiums demanded by investors when purchasing bonds also remain relatively low. Share indices in the euro area fell slightly, most notably in the banking sector. The financial indicators nevertheless suggest that monetary policy transmission was functioning smoothly and homogenously, and was supporting the restoration of inflation to its medium-term target of 2%. The markets continue to expect the cuts in the ECB’s key interest rates to be gradual, given the moderate slowdown in inflation. The interest rate swap curves have priced in another one to two interest rate cuts this year.

On the basis of this data and the expectations with regard to ongoing developments in key aggregates, the Governing Council of the ECB decided to leave its key interest rates unchanged. 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.