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

According to the Governing Council of the ECB, inflation in the euro area has been gradually falling this year, and has been close to its 2% target rate since the summer. Progress has also been made in reducing core inflation and service price inflation, which remain elevated. The projections that we were briefed on today are forecasting inflation to stabilise at close to its target rate over the next three years.
Here a key role will be played by the right monetary policy stance. With the aim of stabilising inflation at its medium-term target rate, today we decided to make the fourth interest rate cut of this year. The interest rate on deposit facility, which steers the monetary policy stance, has now been reduced by 1 percentage point since the first cut made in June, when it stood at 4%. The incoming data and the situation as it stands at the time will continue to be the key factors when monetary policy decisions are taken.

At the latest meeting of the Governing Council the decision was taken to once again lower the key interest rates by 25 basis points. Our decisions will make sure that the monetary policy stance remains right for ensuring that inflation stabilises sustainably at the 2% medium-term target. 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. We will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.

With the fourth cut in the key interest rates since June of this year – the cuts totalling 1 percentage point in all – the Governing Council is responding to the macroeconomic situation, which suggests that inflation is sustainably approaching its target rate. The euro area has seen a slowdown in inflation in 2024, amid weak growth in economic activity. From 2.8% in January, year-on-year inflation has gradually approached its 2% target rate. Core inflation has also slowed in parallel with the easing of supply-side inflation factors. Service price inflation remains high, but has been slowing in current terms in recent months, partly as a result of a slowdown in wage growth. This is consistently reducing any uncertainty surrounding how sustainable the return of inflation to its target rate is. The developments with regard to economic growth are less favourable. Real GDP growth in the third quarter surprised slightly on the upside, although the monthly figures continue to indicate weak growth, in part because of the bad situation in manufacturing, and in part because of slower growth in services.

The decision on this occasion to continue reducing interest rates is also based on the updated macroeconomic projections, which broadly support the outlook from the previous projections in September. Economic growth in the euro area will strengthen over the coming years, but will temporarily be lower over the short term on account of the difficult situation in manufacturing and the weak export dynamics. GDP will grow by 0.7% in real terms this year, before economic growth strengthens to 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027, thanks to the strengthening of real household income and less restrictive monetary policy, assuming that foreign demand also strengthens. Inflation will temporarily rise slightly over the remainder of the year, taking the average rate across the year to 2.4%. Under the sustained influence of the restrictive effects of past monetary policy decisions, and assuming slower growth in labour costs, inflation will fall to 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027. The pace at which inflation falls will depend largely on developments in core inflation, in particular service price inflation, and on developments in domestic cost pressures deriving from the tight labour market.

Banka Slovenije is forecasting similar developments for Slovenia, i.e. a slower recovery in economic growth than predicted in the previous projections, and the stabilisation of inflation around 2%. The projections will be presented in full in the middle of next week.

Amid the gradual normalisation of monetary policy and the expiry of non-standard measures, excess liquidity has continued to gradually decline this year. Since March 2023 the Eurosystem has downsized the securities portfolios under the APP and the PEPP, by gradually and predictably reducing reinvestments. In addition the targeted longer-term refinancing operations (TLTRO-III) have also gradually matured. Excess liquidity has declined from EUR 3,350 billion to EUR 2,900 billion over the course of this year.

The downsizing of the securities portfolios proceeded smoothly, with private-sector investors, foreign institutions among them, building up their securities holdings. The spreads on government bonds over the risk-free yields have gradually risen as expected. Meanwhile the range in the spreads on euro area government bonds narrowed. Rises in risk premiums in the private sector were also gradual, and in historical terms the premiums remain relatively low. Banks in the euro area replaced refinancing operations with market funding, whether via securities issues or interbank trading. All of this is indicative of homogenous monetary policy transmission in all countries, which is a desired objective of monetary policy normalisation.