The latest macroeconomic data for the euro area shows that inflation is in line with its target rate, while economic activity remains relatively resilient to shocks amid heightened uncertainty. In light of this data, the Governing Council of the ECB yesterday decided to leave its key interest rates unchanged. The interest rate on the deposit facility thus remains at 2%. Our next steps will be based on an assessment of the inflation outlook and the risks surrounding it, the dynamics of underlying inflation, and the effectiveness of our measures.
Inflation in the euro area stood at 2.0% in June, up only slightly from the rate of 1.9% in May. June’s slight rise was primarily a reflection of a smaller negative contribution by energy price inflation, given that food price inflation slowed to 3.1%, while core inflation remained unchanged in June at 2.3%. The latter continues to be driven above all by service price inflation, where the expectation is that amid the continuing slowdown in growth in labour costs it will fall over the medium term to a level in line with the inflation target.
Economic activity in the euro area remains robust. Real GDP increased by 0.6% in the first quarter, better than had been expected. This was largely attributable to an increase in exports before the anticipated rise in US tariffs. Economic growth was also supported by private consumption and investment. Meanwhile uncertainty remains pronounced, primarily on account of the unclear outcome of trade negotiations.
The Governing Council of the ECB thus decided at yesterday’s meeting to 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%. The Governing Council’s future decisions will remain focused on seeing inflation stabilise at its 2% target rate over the medium term. Our 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. We will continue to follow a data-dependent and meeting-by-meeting approach to determining the monetary policy stance.
Developments on the financial markets since the Governing Council’s June meeting have been relatively calm, despite the numerous uncertainties that have marked this period. The geopolitical tensions in the Middle East and instability in global trade policy did not have a major impact on the financial situation in the euro area. The prevailing optimism with regard to expansive fiscal policy in euro area countries remains a factor of stability on the financial markets. The spreads in government bonds over the German benchmarks have fallen, while the risk premiums on capital markets remain stable, which is also being reflected in share prices, which are close to record highs. The financial markets thus remain resilient to exogenous shocks, although there remains considerable uncertainty surrounding the latter’s impact on the economy.