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 the current data, the members of the Governing Council yesterday decided to once again cut the ECB’s key interest rates, by 25 basis points. This is the eighth cut since June of last year, taking the cumulative reduction in interest rates to 2 percentage points. 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.
The latest macroeconomic projections for the euro area, which were discussed by the Governing Council at yesterday’s meeting, show inflation at currently around its 2% target rate, while the outlook for economic growth remains similar to the March projections amid increased uncertainty. Real GDP in the euro area is expected to grow by 0.9% this year, before growth strengthens to 1.1% in 2026 and 1.3% in 2027 amid the increase in government spending on defence and infrastructure, and the positive effects of rising real household income and improved financing conditions. The unchanged economic growth forecast for this year reflects the favourable dynamics in economic activity in the final quarter of last year and the first quarter of this year, which outweigh the slightly weaker growth forecast for the remainder of this year. It should be noted that this economic growth outlook is based on an assumption that US tariff policy towards the EU will remain at its current levels, and that there will not be further rises in tariffs.
Having slowed to 1.9% in May, inflation in the euro area is forecast to average 2% this year, thus staying in line with the ECB target rate. It will temporarily fall to 1.6% in 2026, before returning to 2% in 2027. The forecasts for this year and next year are down 0.3 percentage points compared with the March projections, primarily in reflection of the anticipated slowdown in energy price inflation driven by the fall in energy prices on global markets and the stronger euro. Core inflation is forecast at 2.4% this year, but will slow to 1.9% over the next two years amid slower growth in labour costs and the pass-through of lower energy prices.
Given the great uncertainty, the core projection for the euro area is accompanied by two alternative scenarios of developments in trade policies. An escalation of trade tensions could be expected to reduce economic growth and inflation. By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher.
Banka Slovenije will release its new projections for Slovenia on Monday, 9 June.
The Governing Council opted to cut the ECB’s key interest rates by 25 basis points at yesterday’s meeting. It thereby reduced the interest rate on the deposit facility, the rate that best reflects the monetary policy stance, to 2%. The Governing Council’s future decisions will remain focused on seeing inflation stabilise sustainably at its 2% target rate. 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 monetary policy stance.
The financial markets have seen a positive reversal and an improvement in financing conditions since April’s Governing Council meeting, driven mainly by the positive news with regard to temporary trade agreements reached with the US by various countries. Yields on euro area government bonds fell. The spreads on euro area government bonds over the German benchmarks also narrowed slightly further. Share prices have mostly returned to the levels seen before the announcement of the tariff packages, while investors again reduced the risk premiums that they are demanding in private-sector bond markets. The financing conditions consequently improved, which is continuing to support the homogenous functioning of monetary policy transmission. Uncertainty nevertheless remains elevated on the financial markets owing to the interaction of trade and geopolitical tensions, and with regard to the impact on economic and fiscal indicators.