Inflation Slowing but Economic Uncertainty Remains as ECB Charts Gradual Policy Shift
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Inflation has declined faster than expected but is set to pick up again temporarily due to base effects and unwinding of fiscal support measures. More data is needed to confirm the disinflationary process.
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Economic activity remains subdued in the near term but a gradual recovery is projected in 2024 based on rising real incomes and foreign demand. Risks are tilted to the downside.
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Monetary policy transmission is proceeding strongly but the full impact is yet to be felt. Interest rates remain appropriate to bring inflation back to target.
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PEPP reinvestments will end by the end of 2024 in a predictable manner as pandemic emergency fades, with flexibility to address fragmentation risks.
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Financial stability risks could emerge if funding costs or credit risks increase further but resilience has improved and macroprudential policies can contain vulnerabilities.