Economic growth is continuing in the euro area, while inflation remains close to its 2% target rate. In these circumstances the Governing Council of the ECB took the decision at yesterday’s monetary policy meeting to once again leave interest rates unchanged. The interest rate on the deposit facility, which best reflects the monetary policy stance, thus remains at 2.0% for the fifth consecutive meeting. The next steps on the Governing Council will continue to 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.
According to the available data, inflation in the euro area is holding close to its target rate, while economic activity remains relatively resilient to the shocks in the international environment. Inflation in the euro area stood at 1.7% in January according to the Eurostat flash estimate, down 0.3 percentage points on December. The fall in inflation is attributable to a sharp fall in energy price inflation, and a slight decline in service price inflation, which drove core inflation down to 2.2% in January.The euro area economy slightly outperformed expectations in the final quarter of last year: GDP was up 0.3% on the previous quarter in real terms. According to the available monthly data, services were the main driver of the economic expansion, while activity in manufacturing remained under the influence of changes in tariff policy, uncertainty, and worsening competitiveness. Meanwhile the latest PMIs suggest that the picture remains relatively good in the new year: the composite PMI remained in the zone of expansion in January at 51.3 points.
Elevated geopolitical tensions have marked developments on the financial markets since the beginning of the year. The favourable macroeconomic picture meant that yields on government bonds in the majority of euro area countries have nevertheless seen very little change since the December meeting of the Governing Council, and volatility in the government bonds segment remained low. The credit spreads on government bonds and corporate bonds remain at historically low levels. The leading global share indices have mostly risen slightly. All of this is a reflection of the ongoing favourable financing conditions. The strengthened geopolitical tensions were notably reflected on the commodity markets, where gold and silver are hitting record highs.
On the basis of this data, the Governing Council decided at yesterday’s meeting to once again leave the 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. The 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. The monetary policy stance will continue to be decided on a meeting-by-meeting basis.