The Governing Council of the ECB was briefed yesterday on the latest projections, which forecast a continuation of moderate economic growth in the euro area, and the stabilisation of inflation close to its target of 2%. Banka Slovenije will release the projections for Slovenia early next week.
In light of the latest projections and current data, the Governing Council of the ECB yesterday decided to once again leave its key interest rates unchanged. The interest rate on the deposit facility, which best reflects the monetary policy stance, thus remains at 2.0% for the fourth consecutive meeting. Our next steps on the Governing Council will continue to be based on an assessment of the inflation outlook and the risks surrounding it, the dynamics of underlying inflation, and the strength of monetary policy transmission.
According to the projections discussed by the Governing Council at yesterday’s meeting, inflation will average 2.2% this year, before falling to 1.9% next year and 1.8% in 2027 amid a negative contribution from energy price inflation and a slowdown in core inflation. It will then strengthen again to 2.0% by 2028, driven by a slight increase in energy price inflation in connection with the introduction of the new ETS2 emissions trading scheme.
Despite the uncertain external environment, economic growth in the euro area is proving to be more robust than anticipated, and stood at 0.3% in the third quarter of this year. The nowcast for the final quarter of this year suggests that real GDP growth will slow slightly, before strengthening a little again thanks primarily to rising real household income, increased government investment in defence and infrastructure, and improved financing conditions. Economic growth will reach 1.4% this year, before slowing to 1.2% next year – despite higher current growth – as a result of a less positive carry-over effect. Economic growth is forecast to rise to 1.4% in 2027 and 2028. Amid the recovery in domestic demand, the labour market will remain buoyant.
Yields on government bonds have risen since the October meeting of the Governing Council, in response to the mostly positive macroeconomic data for the euro area. The markets have entirely relinquished any expectation of further cuts in the ECB’s key interest rates, and are not anticipating any changes over the course of 2026. Despite the rises in bond yields, the macroeconomic resilience of the euro area is keeping risk premiums in the government and private bond segments low. Volatility on the government bond market also remains very low from a historical perspective. Investors in the share market remain in a positive mood, but are becoming more cautious with regard to the outlook for the US tech sector and the associated heavy investment in AI. The financing conditions for the euro area economy remain supportive from a historical perspective.
On the basis of this data and the latest projections, the Governing Council decided at yesterday’s meeting to once again leave the key interest rates unchanged. The interest rate on the deposit facility, which best reflects the monetary policy stance, thus remains at 2.0%. The Governing Council’s future decisions will remain focused on seeing inflation stabilise at its 2% target rate over the medium term. The next steps will be based on an assessment of the inflation outlook and the risks surrounding it, the dynamics of underlying inflation, and the strength of monetary policy transmission. The monetary policy stance will continue to be decided on a meeting-by-meeting basis.