ECB – Economic Bulletin Issue 8, 2023

The European Central Bank (ECB) decided to keep interest rates unchanged at its latest meeting in December 2023. Although inflation has dropped recently, it is expected to temporarily increase in the near future. The ECB's staff projections show that inflation will gradually decline throughout 2024 and reach the 2% target in 2025. However, compared to previous projections, there has been a downward revision for 2023 and 2024. Underlying inflation has decreased further, but domestic price pressures remain high due to strong growth in unit labour costs. Economic growth is expected to remain subdued in the short term due to tighter financing conditions. However, the economy is expected to recover as real incomes rise and foreign demand improves. The Governing Council is determined to ensure that inflation returns to its target in a timely manner. The ECB's interest rates are considered to be at levels that will contribute to this goal. The Council will continue to make decisions based on data and the outlook for inflation. The ECB also decided to advance the normalization of its balance sheet by reducing the pandemic emergency purchase program (PEPP) portfolio from the second half of 2024. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024. The euro area economy contracted slightly in the third quarter of 2023, primarily due to a decline in inventories. Tighter financing conditions and subdued foreign demand are expected to continue weighing on economic activity in the near term. However, growth is expected to strengthen from early 2024 onwards as real disposable income rises and export growth improves. Governments are advised to roll back support measures related to the energy crisis to avoid driving up inflationary pressures. Fiscal policies should focus on increasing productivity and reducing public debt. Structural reforms and investments supported by the Next Generation EU program can help reduce price pressures and support the green and digital transitions in the long run.