Monetary policy decisions

The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. removed: This added: With this third major removed: step frontloads the transition from the prevailing highly accommodative level of policy removed: rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target. Based on its current assessment, over the next several meetings added: rate increase in a row, the Governing Council removed: expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift added: has made substantial progress in removed: inflation expectations. The Governing Council will regularly re-evaluate its added: withdrawing monetary policy removed: path in light of incoming information and the evolving inflation outlook. The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

added: accommodation. The Governing Council took today’s decision, and expects to raise interest rates further, removed: because added: to ensure the timely return of inflation added: to its 2% medium-term inflation target. The Governing Council will base the future policy rate path on the evolving outlook for inflation and the economy, following its meeting-by-meeting approach.

added: Inflation remains far too high and removed: is likely to added: will stay above added: the target for an extended period. removed: According to Eurostat’s flash estimate, added: In September, euro area inflation reached removed: 9.1% in August. Soaring added: 9.9%. In recent months, soaring energy and food prices, removed: demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks removed: are still driving up inflation. Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term. As the current drivers of inflation fade over time and the removed: normalisation added: post-pandemic recovery in demand have led to a broadening of added: price pressures and an increase in inflation. The Governing Council’s monetary policy removed: works its way through to added: is aimed at reducing support for demand and guarding against the removed: economy and price-setting, added: risk of a persistent upward shift in inflation removed: will come down. Looking ahead, ECB staff have significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024. added: expectations.

removed: After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023. Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity. In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers. This outlook is reflected in the latest staff projections for economic growth, which have been revised down markedly for the remainder of the current year and throughout 2023. Staff now expect the economy to grow by 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024.

removed: The lasting vulnerabilities caused by the pandemic still pose a risk to the smooth transmission of monetary policy. The Governing Council removed: will therefore continue applying flexibility added: also decided to change the terms and conditions of the third series of targeted longer-term refinancing operations (TLTRO III). During the acute phase of the pandemic, this instrument played a key role in removed: reinvesting redemptions coming due in the pandemic emergency purchase programme portfolio, with a view to countering added: downside risks to added: price stability. Today, in view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated to ensure that it is consistent with the broader monetary policy normalisation process and to reinforce the transmission removed: mechanism related added: of policy rate increases to bank lending conditions. The Governing Council therefore decided to adjust the interest rates applicable to TLTRO III from 23 November 2022 and to offer banks additional voluntary early repayment dates.

added: Finally, in order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate.

added: The details of the changes to the removed: pandemic. added: TLTRO III terms and conditions are described in a separate press release to be published at 15:45 CET. Another technical press release, detailing the change to the remuneration of minimum reserves, will also be published at 15:45 CET.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 75 basis points. Accordingly, 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 removed: 1.25%, added: 2.00%, 2.25% and 1.50% removed: and 0.75% respectively, with effect from removed: 14 September added: 2 November 2022.

removed: Following the raising of the deposit facility rate to above zero, the two-tier system for the remuneration of excess reserves is no longer necessary. The Governing Council therefore decided today to suspend the two-tier system by setting the multiplier to zero.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it started raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.

As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

removed: Redemptions added: The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP removed: portfolio are being reinvested flexibly, added: portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

The Governing Council added: decided to adjust the interest rates applicable to TLTRO III. From 23 November 2022 until the maturity date or early repayment date of each respective outstanding TLTRO III operation, the interest rate on TLTRO III operations will removed: continue added: be indexed to removed: monitor bank funding conditions and ensure that the removed: maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy. added: average applicable key ECB interest rates over this period. The Governing Council added: also decided to offer banks additional voluntary early repayment dates. In any case, the Governing Council will removed: also regularly assess how targeted lending operations are contributing to its monetary policy stance.

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The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2% target over the medium term. The Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.