ECB Economic Bulletin Issue 6 is the second economic bulletin published by the ECB this year. The bulletin is issued by the Executive Board of the ECB and is translated by national central banks. The bulletin contains a discussion of the role of public employment in the COVID-19 crisis, as well as monthly indicators and upward trends in nominal variables. The bulletin also contains a box on euro area goods trade and a box on carryover effects. It also includes an article on the dialogue with non-financial companies.
The economic outlook is weak, with the European Commission’s indicator on consumer confidence continuing to fall. The euro area economy is also weakening, with demand for services declining and disposable income falling. There are four key interconnected factors dragging on the euro area economy. This includes a global energy shock, ongoing geopolitical tensions, and declining support for the economy from international demand.
The euro area economy is expected to weaken further in the coming quarters. The Governing Council’s monetary policy is intended to help protect against the risk of persistently high inflation expectations, while also reducing support for demand. The ECB will continue to reinvest principal payments from maturing securities for as long as necessary to maintain an appropriate monetary policy stance.
The ECB also confirmed its intention to increase its policy rate by 75 basis points, to ensure that inflation is back on target in a timely manner. ECB president Mario Draghi said the bank would keep all options on the table as it continues its fight against deflation.
The ECB left its interest rate guidance unchanged. The deposit rate, which banks pay to deposit cash with the ECB overnight, will remain at -0.5%, while the marginal lending facility will increase to 2.25%. The ECB also announced a plan to reinvest principal payments on its own securities, for as long as necessary, to ensure that the appropriate level of liquidity remains available.
While there are still upside inflation risks to the euro area economy, the outlook is less rosy than before. High inflation will dampen spending and reduce purchasing power. It also reflects higher costs to firms and households. The high cost of gas and other energy commodities, as well as severe disruptions in gas supply, are contributing to the inflation situation. This also puts pressure on the euro area trade balance. Inflation is in double digits in several countries.
Banks are also concerned about the deteriorating economy. The ECB’s lending index reflects the net lending rates that firms have to pay for borrowing. The lending index also shows that banks expect to continue tightening their credit standards in the fourth quarter of this year. While the euro area economy is expected to have slowed down in the third quarter of this year, the Governing Council still expects the economy to remain weak.
The ECB has made considerable progress in withdrawing monetary policy accommodation. It has re-calibrated targeted lending operations to ensure price stability. Banks reported a negative impact on their business from the ECB’s asset purchases. They also said that access to retail funding has declined. However, the bank said the combination of monetary policy measures has helped to maintain profitability.