The Governing Council of the ECB was briefed on the latest economic data at yesterday’s monetary policy meeting. It showed economic growth in the euro area remaining weak in the first quarter. Inflation slowed slightly further in March, and is fluctuating around its 2% target rate. Amid numerous changes in US economic and trade policy, there was a further increase in economic uncertainty.
Under these circumstances the Governing Council opted yesterday to make its seventh consecutive cut in interest rates since June of last year, in the amount of 25 basis points. This took the cumulative reduction in interest rates to 1.75 percentage points. 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.
The macroeconomic data for the period up to and including March points to a continuation of weak economic growth and a slowdown in inflation. According to the survey PMIs, economic activity in the euro area continued to strengthen, particularly in services, while March saw the first renewed increase in manufacturing activity after two years of contraction. The uncertainty surrounding future developments increased further, with the recent changes in trade policy posing a significant negative risk to economic activity, which might also be reflected in a changed outlook for inflation. Inflation in the euro area again slowed slightly in March to stand at 2.2%, close to its target rate. Weaker service price inflation was a major factor in March’s fall in inflation. Core inflation also fell in March as a result: the rate of 2.4% was the lowest since January 2022. The data shows the disinflation process in the euro area to be well on track.
Under these circumstances the Governing Council opted to cut the ECB’s 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 2.25%. The Governing Council’s future decisions will remain focused on seeing inflation stabilise sustainably at its 2% target rate. Given the current increased uncertainty, 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 financial markets have witnessed great volatility since the beginning of March, owing to the escalating trade war and the frequent changes of position regarding trade policy in the US. The markets increased their expectation of faster and larger interest rate cuts, which also drove a fall in yields on German and US short-term government bonds. Government bond yields rose slightly at longer maturities. With investors retreating to safer assets, the main US and European share indices fell, while yields on private-sector bonds rose. The spreads on euro area government bonds over the German benchmarks also rose. Despite the increased volatility and the slight decline in liquidity in individual segments of the financial markets, the functioning of monetary policy transmission was not disrupted.