The latest macroeconomic projections point to a continuation of moderate economic growth in the euro area over the entire projection horizon, while inflation will stabilise around its target rate of 2%. Amid increased uncertainty and rising energy prices, the projections for this year are forecasting slightly slower economic growth and slightly higher inflation than forecast in the previous projections.
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 1.5 percentage points. The risks surrounding future developments remain high, and so 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 and the new macroeconomic projections for the euro area, at yesterday’s meeting the Governing Council of the ECB opted to reduce key interest rates by 25 basis points. It thereby reduced the interest rate on the deposit facility, the rate that best reflects the monetary policy stance, to 2.50%. Our monetary policy is thus becoming significantly less restrictive.
Yesterday’s decision was based on the latest macroeconomic projections, which are forecasting slightly slower economic growth and slightly higher inflation for this year amid increased uncertainty and rising energy prices. Real GDP in the euro area is forecast to grow by 0.9% this year, before growth strengthens to 1.2% in 2026 and 1.3% in 2027 amid the positive effects of rising real household income and improved financing conditions, and under the assumption of growth in foreign demand. Inflation will fall slightly over the coming years, and will settle around its 2% target rate. The forecast for this year is 2.3%, and then under the persistent influence of past monetary policy decisions and under the assumption of the normalisation of growth in labour costs, inflation will slow to 1.9% and 2.0% in 2026 and 2027 respectively. Over the short term the inflation dynamics remain largely conditioned by developments in service price inflation, which has persisted at elevated levels for some time now, but is forecast to slow significantly over the course of this year.
The Governing Council’s future decisions will remain focused on seeing inflation stabilise sustainably at its 2% target rate. In light of the growing uncertainty above all, 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 monetary policy stance.
The conditions on the financial markets continue to support the functioning of monetary policy transmission. The decisions in connection with tariffs and broader economic policy by the new administration in the US, and their potential impact on the euro area economy, are raising the uncertainty surrounding economic policy. This is also being reflected in slightly larger movements in market indicators, particularly in recent days. In contrast to those in the US, yields on euro area bonds have risen over the last month, more strongly in the longer section of the yield curve, which is primarily attributable to the anticipated increase in borrowing to finance expenditure on defence and development in the EU. Conversely risk premiums in the private sector remain at historically low levels, while the main share indices are close to the record highs reached in mid-February.