Monetary policy decisions

Inflation removed: has been coming down added: continues to decline but is removed: projected added: still expected to remain too high for too long. The Governing Council 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.

The rate increase today reflects the Governing Council’s removed: updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. removed: According to added: The developments since the removed: June macroeconomic projections, Eurosystem staff expect headline added: last meeting support the expectation that inflation removed: to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. Indicators added: will drop further over the remainder of removed: underlying price pressures remain strong, although added: the year but will stay above target for an extended period. While some added: measures show removed: tentative signs of removed: softening. Staff have revised up their projections for added: easing, underlying inflation removed: 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.

removed: At the same time, the Governing Council’s added: remains high overall. The past rate increases removed: are being added: continue to be transmitted removed: forcefully to added: forcefully: financing conditions added: have tightened again and are removed: gradually having added: increasingly dampening demand, which is an removed: impact across the economy. Borrowing costs have increased steeply and growth added: important factor in removed: loans is slowing. Tighter financing conditions are a key reason why added: bringing inflation removed: is projected added: back to removed: decline further towards target, as they are expected to increasingly dampen demand. added: target.

The Governing Council’s future decisions will ensure that the key ECB interest rates will be removed: brought to levels added: set at sufficiently restrictive added: levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term removed: target and will be kept at those levels for as long as necessary. added: target. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, 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 Governing Council removed: confirms that added: also decided to set the remuneration of minimum reserves at 0%. This decision will preserve the effectiveness of monetary policy by maintaining the current degree of control over the monetary policy stance and ensuring the full pass-through of the interest rate decisions to money markets. At the same time, it will removed: discontinue added: improve the removed: reinvestments under added: efficiency of monetary policy by reducing the removed: asset purchase programme as added: overall amount of removed: July 2023. added: interest that needs to be paid on reserves in order to implement the appropriate stance.

added: The details of the change to the remuneration of minimum reserves are provided in a separate press release to be published at 15:45 CET.

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: 4.00%, 4.25% added: 4.25%, 4.50% and removed: 3.50% added: 3.75% respectively, with effect from removed: 21 June added: 2 August 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 removed: does not reinvest all of added: no longer reinvests the principal payments from maturing securities. removed: The decline will amount to €15 billion per month on average until the end of June 2023. The Governing Council 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 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. 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.