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December 14, 2023EUROPEAN CENTRAL BANK MONETARY POLICY The European Central Bank (ECB) announced today that it would keep the three key ECB interest rates unchanged. The interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will remain at 4.50%, 4.75% and 4.0% respectively. Given the outlook for inflation, the Governing Council believes that key interest rates are at a level that will make a substantial contribution to returning inflation to the 2% target by 2025. ECB have revised their September forecast for inflation downward for 2023 and 2024 to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026.
Underlying inflation has eased further. But domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs. Eurosystem staff expect inflation excluding energy and food to average 5.0% in 2023, 2.7% in 2024, 2.3% in 2025 and 2.1% in 2026.
The asset purchase programme (APP) portfolio is declining at a measured and predictable pace, as the Eurosystem does not reinvest all principal payments from maturing securities. The Governing Council intends to reinvest the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.
Economic activity remains subdued in the near term, but economy is still expected to grow. Foreign demand is recovering and households are likely to benefit from falling inflation and rising real wages. Eurosystem staff therefore see growth picking up from an average of 0.6% for 2023 to 0.8% for 2024, and to 1.5% for both 2025 and 2026.
Inflation excluding energy and food dropped by almost a full percentage point over the past two months, falling to 3.6% in November. This reflects improving supply conditions, the fading effects of the past energy shock and the impact of tighter monetary policy on demand and on the pricing power of firms. The inflation rates for goods and services fell to 2.9% and 4.0% respectively.
The Governing Council notes that future policy rate decisions will be based on its assessment of the inflation outlook (including the dynamics of underlying inflation), incoming economic and financial data, and the strength of monetary policy transmission.
The next scheduled monetary policy meeting will be on February 1, 2024.
Source: European Central Bank: Monetary Policy Decisions, Monetary Policy Statement (Press Conference)
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