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

The euro area economy continued to cool in the final quarter of last year. Inflation rose slightly at the end of the year, and remains above its target rate, but is expected to resume its gradual decline over the coming months.

In these circumstances we took the decision on the Governing Council to leave the ECB’s key interest rates unchanged. Our assessment is that if maintained sufficiently long, the current level of interest rates will make a significant contribution to the timely return of inflation to its target level. The next steps will continue to depend on the incoming economic and financial data, developments in core inflation, and the effectiveness of our measures.

The available monthly indicators suggest that the economic slowdown in the euro area continued in the final quarter of last year. Amid persistently weak demand and tight financing conditions, the slowdown in the economy was broadly based: the sectoral PMIs show a decline in activity in manufacturing and also in services. The weak economic growth was not reflected in the labour market, which remains tight amid record low unemployment. Inflation in the euro area stood at 2.9% in December, up on November as expected, mainly on account of a slowdown in the negative energy price inflation. Meanwhile food price inflation continued to slow, and core inflation fell to 3.4%. The short-term price developments present a favourable outlook for the ongoing anti-inflation process. The main risks of more persistent high inflation continue to come from the tightness of the labour market and elevated wage growth.

The faster easing of inflation is maintaining market participants’ expectations of several cuts in the ECB’s key interest rates this year. This is being reflected in a significant fall in yields on government bonds and private-sector bonds compared with the highs reached late in October of last year. January saw a partial consolidation of yields after a sharp fall over the two preceding months, and a partial correction on the stock markets. Risk premiums nevertheless remain relatively low. The seasonal increase in government bond issuance in the early part of the year was well absorbed by investors. The situation on the financial markets and prices of financial instruments thus continue to reflect market participants’ expectations that central banks will stabilise inflation at 2% without major side effects on the economy.

Based on the latest data, which broadly confirm December’s macroeconomic projections for the euro area, the Governing Council has decided to leave the ECB’s key interest rates unchanged. Our assessment is that if maintained sufficiently long, the current level of interest rates will make a significant contribution to the timely return of inflation to its target level. 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. Our 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.