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February 02, 2023EUROPEAN CENTRAL BANK MONETARY POLICY The European Central Bank (ECB) raised the three key ECB interest rates by 50 basis points. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.00%, 3.25% and 2.50% respectively, with effect from 8 February 2023.
Given the underlaying inflation pressures, the Governing Council noted that it intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy. Future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
The Governing Council intends to continue reinvesting principal payments from maturing securities purchased under the Asset Purchase Program (APP) until the end of February 2023. From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of June 2023 and its subsequent pace will be determined over time.
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.
Euro area economic activity grew 0.1% in the final quarter of 2022. Slowing global demand and high geopolitical uncertainty due to Russia's war in Ukraine are the main headwinds impacting economic recovery in the Euro area. These combined with high inflation and tighter financial conditions are expected to weigh on spending and production, specifically in the manufacturing sector.
However, supply bottlenecks are gradually easing with more secure supply of gas enabling firms to work on large orders of backlogs. Increasing wages and the recent decline in energy prices are expected to offset some of the decline seen in purchasing power due to high inflation. This is expected to support consumption and economic recovery over the coming quarters.
The unemployment rate remained at its historical low of 6.6% in December 2022. However, the rate at which jobs are being created may slow and unemployment could rise over the coming quarters.
According to Eurostat’s flash estimate, inflation in the Euro area was 8.5% in January 2023, 0.7 percentage points lower than the December inflation rate. As the impacts of high energy prices continue to spread through the other parts of the economy, price pressures remain strong. Fiscal measures to compensate households for high energy prices are expected to lower inflation in 2023 but will increase once they are withdrawn. Supply bottlenecks are gradually easing, although their effects are still contributing to inflation, pushing up goods prices in particular.
The next scheduled monetary policy meeting will be on March 16, 2023.
Source: European Central Bank: Monetary Policy Decisions, Monetary Policy Statement (Press Conference)