Foreword by the President

Dear readers,

We are living in demanding times, up against numerous economic and socio-political challenges, including globalization, digital transformation, climate change and demographic change. Finding solutions that reflect our values and support our goals will require the input of many. It is up us to intensify the dialogue among policymakers, businesses, scientists and civil society.

The ECB, for its part, has been fostering price stability and supporting the euro area economy for the past 25 years, even as we went through multiple crises in and after 2008: a substantial financial crisis, a ­sovereign debt crisis and, most recently, the COVID-19 pandemic. Depending on the development of the crises, the ECB used a range of monetary policy tools. Ultimately, the global economic fallout from the pandemic and Russia’s invasion of Ukraine led to a broad increase in prices. While the ECB did manage to dampen inflation by raising key interest rates, inflation rates continue to exceed the agreed inflation ­target of 2%.

In Austria, the euro continues to have high acceptance rates. During the 25 years since its introduction, the euro has been asserting itself as a global currency given the strength of the euro area economies. Above all, export-oriented countries like Austria have been benefiting from the advantages that come with having a common European currency.

With a view to strengthening financial literacy in Austria and supporting informed investment decisions, the OeNB developed a transparency platform for savings account interest rates in 2023. This new tool enables savers to compare the interest rate conditions for different types of savings and to evaluate the market performance of saving instruments and conditions offered by individual banks.

Microprudential and macroprudential supervisors continued to focus on loans to finance real estate transactions. The commercial real estate market has been suffering from rising interest rates, increasing building costs, shrinking real estate prices and the generally weak economic conditions. The OeNB continues to monitor these developments closely to be able to estimate the underlying risks to price stability and the financial system and to take adequate action if required.

The OeNB also continued to support independent and high-quality empirical economic research. After all, such research generates crucial input for public policymaking and serves to keep the public informed about economic policy measures. This is why we stand ready to use OeNB Anniversary Fund assets to support independent economic research in Austria. The OeNB seeks to ensure a level playing field for basic research projects on topics that are relevant for monetary policymaking. The OeNB’s motivation is to strengthen the competitiveness of research made in Austria and also contribute to raising the attractiveness of economic research in Austria.

In closing, let me express my gratitude to all General Council and Governing Board members, and to the entire staff working at the OeNB and at the OeNB’s subsidiaries for their excellent cooperation in 2023.

Vienna, March 2024

Harald Mahrer, President

Foreword by the Governor

Dear reader,

2023 was another year marked by geopolitical conflicts and wars that created major political and economic challenges. And geopolitics will be a concern also in 2024, given relentless armed conflicts and elections coming up in several major economies.

In terms of economic growth, 2023 was a weak year: annual GDP in the euro area increased by just 0.6% from 2022. The outlook for 2024 is also within this range (+0.8% growth), given continued tight financing conditions and lackluster export growth. The outlook for 2025 and 2026 is brighter, though. Annual inflation dropped to 5.4% in 2023, given easing cost pressures and the impact of monetary policy measures. In 2024, inflation is expected to drop further, to 2.7%. Thereafter, inflation is projected to converge to the Euro­system’s target value for inflation of 2%.

Owing to weak momentum from consumption and investment, Austria’s economic output shrank ­considerably in the second and third quarters of 2023. In 2023 as a whole, economic output dropped by 0.7%. On the back of strengthening consumer demand, we expect to see a turnaround starting in early 2024, i.e. a return to positive growth rates. Hence, we project 0.6% growth for 2024. Domestic HICP ­inflation reached 7.7% in 2023, thus exceeding euro area inflation. However, for 2024, we project the HICP rate to drop to 4.0%, and to even lower rates in the following years.

Thus, combating inflation continued to be the key challenge for monetary policymakers in the euro area and in Austria in 2023. All in all, the Governing Council of the ECB raised the key interest rates for the euro area six times in 2023 from 2% to 4%. Furthermore, the Eurosystem started to decrease at a measured pace the monetary policy portfolios acquired under asset purchase programs and banks started to repay longer-term refinancing operations, both of which will cause central bank balance sheets to shrink over time.

For the Eurosystem, rising interest rates for the deposit facility imply a higher interest expense for commercial banks’ deposits with the central bank. Besides, this expense far exceeds the small stream of income from the large amount of securities with low or even negative yields that the Eurosystem central banks had acquired when implementing nonstandard monetary policy measures. Hence, like many other Eurosystem central banks, the OeNB reports a loss from monetary policy operations for 2023.

Ultimately, these losses do not detract from the effectiveness of the euro area monetary policy, however. Any profit or loss recorded by Eurosystem central banks, including the OeNB and the ECB, is a corollary to the joint mandate of safeguarding price stability in the euro area in the medium run.

Yet, rather than zooming in on temporary losses arising from monetary policy, let us zoom out to the bigger picture, including the economic benefits we have been able to reap from the many years of accommodative monetary policy – above all the stabilization of the euro area economy and the impact on the general government budget. The interest expense saved by the Austrian government due to the Eurosystem’s nonstandard monetary policy totals some EUR 34.7 billion since 2012.

To conclude, let me express my heartfelt gratitude to the President and Vice President, the General Council, my fellow Governing Board members as well as all our staff members for their excellent cooperation and outstanding commitment in what has been a challenging year.

Vienna, March 2024

Robert Holzmann, Governor

The OeNB at a glance

What we do

With a view to fulfilling our tasks and delivering on our mandate, we have defined the following six strategic priorities for the period until 2025:

OeNB & Eurosystem/IMF; monetary policy and the economy

• The OeNB strives for thematic leadership in select areas within the Eurosystem.
• The OeNB handles IMF-related matters concerning Austria.
• The OeNB is Austria’s knowledge and resource hub for monetary policy and theory, and our staff research supports the OeNB’s stance in the decision-making process of the Governing Council of the ECB.
• The OeNB serves as a knowledge and resource hub for analyzing economic and financial policy challenges.
• The OeNB is the think tank on economic growth in Austria, monitoring in particular the alignment between microeconomic and macroeconomic patterns.
• The OeNB keeps serving Austria with cash in the digital age.

Financial stability and strategy

• The OeNB contributes to enhancing transparency through high-quality financial statistics, thus building trust.
• The OeNB helps safeguard the stability of the Austrian banking and financial system.
• The OeNB seeks to ensure effective rules and technology-neutral approaches to banking regulation in the EU’s banking union, advocating a narrower set of simplified rules for smaller banks.
• The OeNB contributes to reinforcing the stability of the Austrian capital market.
• The OeNB fulfills its monetary policy mandate and helps maintain the stability of the banking and financial system, implementing environmental, social and governance (ESG) criteria.

Financial innovation

• The OeNB plays a key role in developing and regulating financial innovations.
• The OeNB is crucial for making Austria’s financial system more resilient to cyberattacks.
• The OeNB works intensively with external partners to enhance financial innovation.

Financial education

• The OeNB contributes to financial education and hence to the financial health of the general public in Austria.
• The OeNB seeks to set international standards by promoting financial literacy in Austria.
• The OeNB is committed to leading the way in monitoring financial literacy and the effectiveness of related measures.
• The OeNB offers independent expertise with its financial education outreach programs for Austria.

Business organization, recruiting and digital tech

• The OeNB strives to be a forward-looking organization.
• The OeNB promotes ESG, i.e. sustainable as well as ethical behavior and good corporate ­governance.
• The OeNB seeks to be an innovative employer.
• The OeNB embraces digital tech and automation.

Communications

• The OeNB is a household name for the majority of Austrians.
• The OeNB is perceived as an independent and modern organization.
• The OeNB is associated with thematic leadership regarding a broad range of issues, including price stability, financial stability, economic policy, financial statistics, financial education, money and payments.
• The OeNB has earned the trust of the general public, financial market participants and other stakeholders, and is also considered to be a trusted employer.
• Our employees are proud to work for the central bank.
• Our communication across business areas is effective and efficient.

Inflation remained a major challenge for monetary policy

How much do key interest rates need to increase for inflation to be under control?

Overall, inflation averaged 5.4% in 2023, just as forecast in the Eurosystem staff macroeconomic projections released in December 2023. In other words, inflation remained well above the 2% price stability target.

Inflation in Austria well above euro area inflation in 2023

In Austria, HICP inflation peaked at 11.6% in January 2023. Thereafter, it gradually declined to 5.7% in December.

In 2022, inflation had been mainly driven by energy and other import prices. By the end of 2022, corporate profits were starting to fuel inflation as well. In due course, wages and salaries emerged as additional price drivers. Since the second quarter of 2023, about half of the uptick in prices in Austria has been attributable to wage and salary costs (see the OeNB’s December 2023 economic outlook for Austria ; available in German only).

Furthermore, nonenergy services and industrial goods have been increasingly affecting inflation; in contrast, energy and food prices were on the decline in 2023 (chart 1). This trend is expected to continue in 2024. In our 2024 December forecast, we expect inflation to drop from an annual average of 7.7% in 2023 to 4.0% in 2024.

Core inflation, i.e. headline inflation excluding energy and food, has exceeded headline HICP inflation since June 2023, for the following reasons: Energy prices have been falling, whereas the contribution of services prices to inflation has increased. This trend is also likely to continue in 2024, when we expect core inflation to average 4.5%.

Austria’s HICP inflation was below that of the euro area up to mid-2022; afterwards, the trend reversed. There are three reasons for this:

1. Energy price cuts were passed through to Austrian households with a time lag.

2. As a result of higher wage growth, services prices in Austria have been rising more strongly – and they come with comparatively higher weights in the Austrian basket of goods.

3. The fiscal measures adopted by the Austrian government tended to be based on transfer payments rather than direct price interventions.

Looking ahead, we expect the inflation differential between Austria and the euro area to narrow to just over 1 percentage point in 2024, and to narrow further to less than 1 percentage point in 2025.

The challenge for monetary policymakers in 2023 was to gauge how much key interest rates would need to be raised for inflation to be brought under control. Higher key interest rates affect inflation via the real economy and thus with a time lag. In other words, the mechanism inherent in the process of monetary policy transmission implies the following: To curb high inflation rates, monetary policymakers have to dampen the real economy, and they do so by raising key policy rates. Higher interest rates, among other things, make loans for consumers and businesses more expensive, reducing their propensity to spend and thus dampening consumption and investment. This, in turn, weakens economic activity, as a result of which companies tend to refrain from ­increasing prices – causing inflation to fall.