Inflation in the euro area is converging on our medium-term target of 2%, while economic activity in the final quarter of last year remained unchanged from the previous quarter. Under these circumstances the Governing Council of the ECB yesterday opted once again to reduce key interest rates by 25 basis points. This brings the cumulative cut since June of last year, when the Governing Council made its first rate cut, to 1.25 percentage points. The risks surrounding future developments remain high, and thus incoming data and the situation as it stands at the time will continue to be the key factors when monetary policy decisions are taken.
Based on the latest data, which broadly confirms the macroeconomic projections released in December, at yesterday’s meeting the Governing Council of the ECB opted once again to reduce key interest rates by 25 basis points. The interest rate on the deposit facility, which is used to steer the monetary policy stance, will stand at 2.75% after the change.
The Governing Council’s future decisions will continue making sure that the monetary policy stance remains right for ensuring that inflation stabilises sustainably at the 2% medium-term target. Our 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.
Economic activity in the euro area in the final quarter of last year remained unchanged from the previous quarter. The survey indicators point to further contraction in manufacturing activity, while services are continuing to strengthen. The uncertainty surrounding future development remains high. The labour market is showing signs of a gradual slowdown in demand, but unemployment remains at a record low level. Inflation in the euro area rose slightly to 2.4% in December, in line with expectations, which largely reflects a rise in energy price inflation (from -2.0% to 0.1%) as a result of a base effect. Core inflation meanwhile remained unchanged at 2.7%, and continues to mainly reflect the high service price inflation of 4.0%.
The developments on the financial markets since the beginning of December have mainly been driven by reduced expectations with regard to the cuts in key interest rates at the Fed and, to a lesser extent, at the ECB. Yields on US and German government bonds rose in consequence. The US dollar strengthened in value. Energy prices also rose, affecting market inflation expectations in the euro area, which rose slightly after several months of decline, although they remain close to the target level of 2%. Private-sector risk premiums remained low, despite the rise in government bond yields. The conditions on the financial markets continue to support the effective functioning of monetary policy transmission.
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