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June 06, 2024EUROPEAN CENTRAL BANK MONETARY POLICY The European Central Bank (ECB) announced today that it would lower the three key ECB interest rates by 25 basis points. The interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will now be at 4.25%, 4.50% and 3.75% respectively.
Global economic activity continues to improve at a slow pace. Labour markets are gradually cooling, nominal wage growth is moderating, and excess savings are diminishing in advanced economies. Previous monetary policy decisions and elevated economic uncertainty around geopolitical tensions are slowing growth. The global economy is projected to grow at 3.3% in 2024, 3.3% in 2025 and 3.2% in 2026. Global trade is expected to recover this year and continue to grow in line with global activity in the years following. The recovery of euro area foreign demand this year is expected to be less dynamic at 2.1%. Inflation is projected to decline to 4.2% in 2024, 3.3% in 2025, and 2.9% in 2026 with fading supply shocks and restrictive monetary policy.
Inflation has continued to fluctuate below 3% in recent months. In May, inflation rose 2.6% from a 2.4% in April according to Eurostat's flash estimate. Measures of underlying inflation have declined further, confirming the gradually diminishing price pressures. Labour costs are expected to fluctuate in the near term as wages catch up to the past inflation surge. Forward looking indicators signal that wage growth will moderate over the course of the year. Inflation is expected to fluctuate around the current level in the short term and then decline towards the target in the second half of next year. The Eurosystem staff project that the headline inflation will be at 2.5% in 2024, 2.2% in 2025, 1.9% in 2026.
The economy grew at 0.3% in the first quarter of 2024. The Eurosystem staff estimate that real GDP will grow at 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026. Service sector is growing along with a stabilizing manufacturing sector. The economy is expected to continue to recover as real income is pushed up by higher wages and improved terms of trade. With growing demand, exports are expected to rise over the coming quarters. Employment rose by 0.3% in the first quarter with continued job growth in the near term. Unemployment declined to 6.4% in April with job vacancies still present, but at a lower quantity.
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.
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 July 18, 2024.
Source: European Central Bank: Monetary Policy Decisions, Monetary Policy Statement (Press Conference), Macroeconomic Projections
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