ECB Annual Report for 2012

In an environment of contracting economic activity and volatile financial conditions brought about by the financial and sovereign debt crisis, 2012 was another challenging year for the conduct of monetary policy. Nevertheless, the credibility of the ECB’s monetary policy remained high, as reflected by the continued firm anchoring of medium to longer-term inflation expectations in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term.

Real economic activity in the euro area declined  in 2012, mainly on account of weak investment and private consumption. This development reflected weak economic confidence, heightened uncertainty and the ongoing process of balance sheet adjustment in the financial and non-financial sectors, combined with high unemployment, a tighter fiscal stance and subdued foreign demand.

Annual inflation remained at elevated levels in 2012 despite the  unfavourable macroeconomic environment, although it declined in the course of the year. The level of inflation largely reflected strong rises in energy prices and increases in indirect taxes and administered prices in a number of euro area countries. On average, inflation stood at 2.5% in 2012, after 2.7% in 2011. The underlying pace of monetary expansion was subdued throughout 2012. Given the easing of inflationary pressures over the policy-relevant horizon on account of the materialisation of some downside risks to economic growth, the Governing Council decided in July 2012 to lower the key ECB interest rates by 25 basis points. […]

Full text