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June 15, 2023EUROPEAN CENTRAL BANK MONETARY POLICY The European Central Bank (ECB) raised the three key ECB interest rates by 25 basis points as the inflation outlook continues to be too high for too long. The interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility will be increased to 4.00%, 4.25% and 3.50% respectively, effective 21 June 2023.
As announced in the February Monetary Policy Meeting, 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 decline will amount to €15 billion per month on average until the end of June 2023 and the Governing Council expects to discontinue the reinvestments under the APP as of July 2023.
The Governing Council intends to reinvest the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) until at least the end of 2024. The Governing Council noted that the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
Economic activity in the euro area has stagnated in recent months and contracted by 0.1% in the first quarter of 2023 due to a drop in private and public consumption. Economic growth is expected to remain weak in the short term but strengthen as inflation continues to come down and supply disruptions continue to ease. Activity in the services sector remain resilient while manufacturing continues to weaken due to lower global demand and tighter euro area financing conditions.
The labour market remains strong as almost a million new jobs were added in Q1 2013 and the unemployment rate is still at its historical low of 6.5% as of April 2023.
According to Eurostat’s flash estimate, inflation dropped further to 6.1% in May from 7.0% in April 2023. The drop was broad based with both energy and food price inflation slowing. Price pressures remain strong although some show tentative signs of softening. Past increases in energy costs are pushing up prices while pent-up demand continue to drive up services inflation. Wage pressures are also becoming an increasingly important source of inflation with compensation up 5.2% in the first quarter. The Governing Council noted that as the energy crisis fades, governments should roll back the related support measures promptly and in a concerted manner to avoid driving up medium-term inflationary pressures, which would call for a stronger monetary policy response.
According to the June macroeconomic projections, Eurosystem staff expect headline inflation to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. Tighter financing conditions driven by higher interest rate are a key reason behind the projected decline in inflation as they are expected to increasingly lower demand.
The euro area economy is expected to grow 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025, representing a slight downgrade for the next two years compared to March projections.
The Governing Council noted that future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary. Future policy rate decisions will be based on a data-dependent approach and its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.
The next scheduled monetary policy meeting will be on July 27, 2023. An updated summary of economic projections is also expected to be published om June 29, 2023.
Source: European Central Bank: Monetary Policy Decisions, Monetary Policy Statement (Press Conference)
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