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The European Central Bank (the ECB, the regulator of the 20 countries that share the euro) kept interest rates at a record high on Thursday, but sent an even clearer signal that it may be preparing to cut them as euro zone inflation continues to falls
Arguments that have already been said are used as arguments
on the medium-term outlook for inflation. It has continued to decline, mainly thanks to lower inflation in the prices of food and other goods. Increased headline inflation is easing, wage growth is gradually offsetting, and businesses are partially compensating with profits and rising labor costs.
If the Governing Council’s updated assessment of the outlook for inflation, the dynamics of core inflation and the strength of monetary policy transmission further increases its confidence that inflation is approaching the target in a sustainable manner, it would be appropriate to reduce the current level of monetary policy constraint , the ECB’s announcement also says.
Funding conditions remain tight and interest rate hikes to date continue to dampen demand, which is to lower inflation. However, the internal price pressure is strong and supports high inflation of service prices, the banking regulator of the Eurozone announced on its website after the end of today’s meeting to determine the bank’s monetary policy, which is the third for this year.
Thus, today, at the fifth consecutive meeting, the ECB froze the record high levels of its three main interest rates, which were last raised on September 20, 2023. The first was held on January 25. In addition, the ECB acknowledged that inflation is easing and moving towards the medium-term target level of 2%.
According to the announcement, the Governing Council believes that the main interest rates of the ECB are at a level that contributes significantly to the ongoing process of disinflation. Its future decisions will ensure that key interest rates remain sufficiently restrictive for as long as necessary. If its updated assessment of the inflation outlook, the dynamics of core inflation and the sound conduct of monetary policy further strengthens confidence that inflation is steadily approaching the target level, it would be appropriate to reduce the current level of monetary policy tightening.
In any case, the Governing Council will continue to take a data-driven approach and make decisions on a meeting-by-meeting basis when determining the appropriate level and duration of restrictiveness, and will not pre-commit to a specific interest rate trajectory, the statement added.
It remains to be seen whether ECB Governor Christine Lagarde supports expectations for a rate cut in June, which would set up a serious conflict with the Fed. Federal Reserve officials have already pledged that the first interest rate cut will move away from June and will most likely be in September, and possibly later.
However, points out that the currency bloc is now in its sixth straight quarter of economic stagnation and the labor market is beginning to soften, a stark contrast to the US economy, which continues to grow steadily. This may also influence the ECB to delay interest rate cuts.
Interest rates again unchanged
The main interest rates effective from 20 September 2023 remain as follows: 4% on the deposit facility (the interest that banks receive on their overnight deposits with the central bank); 4.50% on the main refinancing operations (when banks borrow funds from the ECB for a period of one week); 4.75% on the marginal credit facility (the interest that banks pay when they borrow overnight funds from the ECB).
Thus, the interest rate break continues for the fifth consecutive meeting, already 6 and a half months, after 10 consecutive increases or after 17 months of constant growth of all three interest rates.
The two asset purchase programs
The Asset Purchase Program (APP) portfolio is declining at a measured and predictable pace as the Eurosystem no longer reinvests the principal repayments of maturing securities.
At the same time, the Board intends to continue to fully reinvest the principal repayments of maturing securities acquired under the Pandemic Emergency Asset Purchase Program (PEPP) in the first half of 2024. In the second half of the year, he plans to reduce the PEPP portfolio by an average of 7.5 billion euros per month. The Board intends to end PEPP reinvestment at the end of 2024.
The Governing Council will continue to take a flexible approach to the reinvestment of payouts becoming due in the PEPP portfolio so as to counter pandemic-related risks to the monetary policy transmission mechanism.
Refinancing operations
In the course of the process by which banks repay funds borrowed in targeted long-term refinancing operations, the Governing Council will regularly assess how targeted lending operations and ongoing repayment contribute to its monetary policy stance.
It concludes that the Governing Council is ready to adjust all its instruments within its mandate to ensure a return of inflation to the 2% target level over the medium term and to maintain the smooth functioning of the monetary policy transmission mechanism. In addition, the Monetary Policy Transmission Facility is available to counter unwanted, chaotic market dynamics seriously threatening the transmission of monetary policy in all euro area countries. This will allow the Governing Council to fulfill its mandate of price stability more effectively.
