Monetary policy decisions

removed: The inflation outlook continues added: Inflation has been coming down but is projected to removed: be added: remain too high for too long. removed: In light of the ongoing high inflation pressures, the added: The Governing Council added: is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore today decided to raise the three key ECB interest rates by 25 basis points. removed: Overall,

added: The rate increase today reflects the removed: incoming information broadly supports the added: Governing Council’s updated assessment of the removed: medium-term inflation removed: outlook that added: outlook, the removed: Governing Council formed at its previous meeting. Headline added: dynamics of underlying inflation, and the strength of monetary policy transmission. According to the June macroeconomic projections, Eurosystem staff expect headline inflation removed: has declined over recent months, but added: to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. Indicators of underlying price pressures remain removed: strong. added: strong, although some show tentative signs of softening. Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation. They now see it reaching 5.1% in 2023, before it declines to 3.0% in 2024 and 2.3% in 2025. Staff have slightly lowered their economic growth projections for this year and next year. They now expect the economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.

At the same time, the added: Governing Council’s past rate increases are being transmitted forcefully to removed: euro area financing added: conditions and removed: monetary conditions, while added: are gradually having an impact across the removed: lags added: economy. Borrowing costs have increased steeply and removed: strength of transmission added: growth in loans is slowing. Tighter financing conditions are a key reason why inflation is projected to removed: the real economy remain uncertain. added: decline further towards target, as they are expected to increasingly dampen demand.

The Governing Council’s future decisions will ensure that the removed: policy added: key ECB interest 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. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, removed: the Governing Council’s policy added: its interest rate decisions will continue to be based on 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 removed: key ECB interest rates remain the Governing Council’s primary tool for setting the monetary policy stance. In parallel, the Governing Council added: confirms that it will removed: keep reducing the Eurosystem’s asset purchase programme (APP) portfolio at a measured and predictable pace. In line with these principles, the Governing Council expects to discontinue the reinvestments under the removed: APP added: asset purchase programme as of July 2023.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 25 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: 3.75%, 4.00% added: 4.00%, 4.25% and removed: 3.25% added: 3.50% respectively, with effect from removed: 10 May added: 21 June 2023.

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

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem does 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. The Governing Council removed: expects to added: will discontinue the reinvestments under the APP as of July 2023.

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

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations added: and their ongoing repayment 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 returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. removed: The ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed. Moreover, 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.