Monetary policy decisions

The Governing Council today decided to raise the three key ECB interest rates by removed: 75 added: 50 basis removed: points. With this third major policy rate increase in a row, added: points and, based on the substantial upward revision to the inflation outlook, expects to raise them further. In particular, the Governing Council removed: has made substantial progress in withdrawing monetary policy accommodation. The Governing Council took today’s decision, and expects to raise added: judges that interest rates removed: further, added: will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure removed: the added: a timely return of inflation to removed: its added: the 2% medium-term added: target. Keeping interest rates at restrictive levels will over time reduce inflation removed: 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.

removed: Inflation remains far too high added: by dampening demand and will removed: stay above the target for an extended period. In September, euro area inflation reached 9.9%. In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation. The Governing Council’s monetary policy is aimed at reducing support for demand and guarding added: also guard against the risk of a persistent upward shift in inflation expectations. added: The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.

added: The key ECB interest rates are the Governing Council’s primary tool for setting the monetary policy stance. The Governing Council today also discussed principles for normalising the Eurosystem’s monetary policy securities holdings. 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 the second quarter of 2023 and its subsequent pace will be determined over time.

added: At its February meeting the Governing Council will announce the detailed parameters for reducing the APP holdings. The Governing Council will regularly reassess the pace of the APP portfolio reduction to ensure it remains consistent with the overall monetary policy strategy and stance, to preserve market functioning, and to maintain firm control over short-term money market conditions. By the end of 2023, the Governing Council will also review its operational framework for steering short-term interest rates, which will provide information regarding the endpoint of the balance sheet normalisation process.

The Governing Council removed: also decided to removed: change added: raise interest rates today, and expects to raise them significantly further, because inflation remains far too high and is projected to stay above the removed: terms added: target for too long. According to Eurostat’s flash estimate, inflation was 10.0% in November, slightly lower than the 10.6% recorded in October. The decline resulted mainly from lower energy price inflation. Food price inflation and removed: conditions added: underlying price pressures across the economy have strengthened and will persist for some time. Amid exceptional uncertainty, Eurosystem staff have significantly revised up their inflation projections. They now see average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023, with inflation expected to decline markedly over the course of the removed: third series of targeted longer-term refinancing operations (TLTRO III). During the acute phase of the pandemic, this instrument played a key role added: year. Inflation is then projected to average 3.4% in removed: countering downside risks to price stability. Today, added: 2024 and 2.3% in removed: view of the unexpected added: 2025. Inflation excluding energy and removed: extraordinary rise in inflation, it needs added: food is projected to be removed: recalibrated to ensure that it is consistent with the broader monetary policy normalisation process and to reinforce the transmission 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 added: 3.9% on average in 2022 and to removed: offer banks additional voluntary early repayment dates. added: rise to 4.2% in 2023, before falling to 2.8% in 2024 and 2.4% in 2025.

removed: Finally, added: The euro area economy may contract in removed: order added: the current quarter and the next quarter, owing to removed: align the removed: remuneration of minimum reserves held by credit institutions added: energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions. According to the latest Eurosystem staff projections, a recession would be relatively short-lived and shallow. Growth is nonetheless expected to be subdued next year and has been revised down significantly compared with the added: previous projections. Beyond the near term, growth is projected to recover as the current headwinds fade. Overall, the Eurosystem removed: more closely with money market conditions, added: staff projections now see the removed: Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate.

removed: The details of the changes to the TLTRO III terms added: economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and removed: conditions are described added: 1.8% in removed: 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. added: 2025.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by removed: 75 added: 50 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: 2.00%, 2.25% added: 2.50%, 2.75% and removed: 1.50% added: 2.00% respectively, with effect from removed: 2 November added: 21 December 2022.

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 removed: for an extended period added: until the end of removed: time past added: February 2023. Subsequently, the removed: date when it started raising added: APP portfolio will decline at a measured and predictable pace, as the removed: key ECB interest rates and, in any case, for as long as necessary added: Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to removed: maintain ample liquidity conditions added: €15 billion per month on average until the end of the second quarter of 2023 and removed: an appropriate monetary policy stance. added: its subsequent pace will be determined over time.

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.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

removed: The Governing Council decided to adjust added: As banks are repaying the removed: interest rates applicable to TLTRO III. From 23 November 2022 until added: amounts borrowed under the removed: maturity date or early repayment date of each respective outstanding TLTRO III operation, the interest rate on TLTRO III operations will be indexed to the average applicable key ECB interest rates over this period. The Governing Council also decided to offer banks additional voluntary early repayment dates. In any case, added: targeted longer-term refinancing operations, the Governing Council will 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 removed: stabilises at added: returns to 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.