Monetary policy decisions

The Governing Council today decided to keep the three key ECB interest rates unchanged. removed: The incoming information added: While inflation has removed: broadly confirmed its previous assessment of added: dropped in recent months, it is likely to pick up again temporarily in the removed: medium-term added: near term. According to the latest Eurosystem staff projections for the euro area, inflation removed: outlook. Inflation is removed: still expected to removed: stay too high added: decline gradually over the course of next year, before approaching the Governing Council’s 2% target in 2025. Overall, staff expect headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026. Compared with the September staff projections, this amounts to a downward revision for removed: too long, added: 2023 and added: especially for 2024.

added: Underlying inflation has eased further. But domestic price pressures remain removed: strong. At the same time, inflation dropped markedly in September, including due added: elevated, primarily owing to strong removed: base effects, added: growth in unit labour costs. Eurosystem staff expect inflation excluding energy and removed: most measures of underlying inflation have continued added: food to removed: ease. added: average 5.0% in 2023, 2.7% in 2024, 2.3% in 2025 and 2.1% in 2026.

The removed: Governing Council’s past interest rate increases continue to be transmitted forcefully removed: into added: to the economy. Tighter financing removed: conditions. This added: conditions are dampening demand, and this is removed: increasingly dampening demand and thereby helps added: helping to push down inflation. added: Eurosystem staff expect economic growth to remain subdued in the near term. Beyond that, the economy is expected to recover because of rising real incomes – as people benefit from falling inflation and growing wages – and improving foreign demand. Eurosystem staff therefore see growth picking up from an average of 0.6% for 2023 to 0.8% for 2024, and to 1.5% for both 2025 and 2026.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive 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 added: its interest rate decisions will 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.

added: The key ECB interest rates are the primary tool for setting the monetary policy stance. The Governing Council also decided today to advance the normalisation of the Eurosystem’s balance sheet. It intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.

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

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.

removed: As concerns the PEPP, the added: The Governing Council intends to removed: reinvest added: continue to reinvest, in full, the principal payments from maturing securities purchased under the removed: programme until added: PEPP during the first half of 2024. Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The Governing Council intends to discontinue reinvestments under the PEPP at removed: least the end of 2024. removed: 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.