Governor’s statement following the meeting of the Governing Council of the ECB

07/23/2021 / Press release

The economic picture in the euro area improved sharply in the second quarter of this year. The health situation, the vaccine rollout and the easing of containment measures have given rise to a broad-based recovery. The Governing Council assesses these developments as on track with our forecasts, while the risks remain evenly balanced. The situation on the financial markets remains stable, amid significant monetary policy support.

In this situation the Governing Council decided yesterday to maintain our accommodative monetary policy stance, thereby continuing to ensure ample liquidity and favourable financing conditions for the banking sector, the non-banking sector and the governments of the Eurosystem. We also revised our forward guidance, which now encompasses a new inflation target (adopted as part of the monetary policy strategy review), and takes into account that key interest rates have been close to their lower bound for some time now.

The faster vaccine rollout and the easing of containment measures have led to a significant improvement in the economic picture in the euro area. The high-frequency indicators for the second quarter are showing a strong rebound in economic activity, which is in line with the macroeconomic projections drawn up at the ECB in June. The economic recovery has also become more broadly based in recent months, which is bringing an improvement in the labour market situation. While manufacturing continues to record high growth, the easing of the containment measures in recent months has brought a sharp improvement in the situation in services. In June the services PMI for the euro area reached its highest level since July 2007, and points to a fast recovery.

The outlook for the coming months remains good, while the risks over the projection period remain evenly distributed. Faster growth could lead to increased spending of the savings accumulated during the crisis. This could also be helped by a faster improvement in the health picture. However, the delta variant is already causing a renewed surge in cases in certain euro area countries, and represents the greatest risk of slower growth.

The situation on the financial markets remains good. The borrowing costs of private-sector issuers on the capital markets remain very low, while the same applies to the borrowing of individual countries. After rising from the beginning of the year, the required yields on long-term euro area government bonds have fallen since the second half of May. Slovenia’s sovereign borrowing costs for 10-year bonds had fallen from 0.29% in mid-May to around -0.10% by July. The government is thus again able to borrow at negative interest rates.

In light of the current economic picture and the uncertainty surrounding the future evolution of the epidemic, the Governing Council of the ECB is maintaining its accommodative monetary policy stance. The envelopes of the APP and PEPP thus remain unchanged. The envelope of the PEPP in the current quarter remains higher than in the early months of the year.

We also revised our forward guidance, which now encompasses a new inflation target (adopted as part of the monetary policy strategy review), and takes into account that key interest rates have been close to their lower bound for some time now. “In support of its symmetric 2% inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. This may also imply a transitory period in which inflation is moderately above target.”

The ECB’s accommodative policy measures will thus continue to ensure ample liquidity and favourable financing conditions for the banking sector, the non-banking sector and euro area governments, thereby supporting the ongoing economic recovery after the epidemic and ensuring stable price growth over the medium term.