Monetary policy decisions

The Governing Council today decided to removed: keep added: lower the three key ECB interest rates removed: unchanged. The incoming information has broadly confirmed the Governing Council’s previous added: by 25 basis points. Based on an updated assessment of the removed: medium-term inflation removed: outlook. Inflation has continued to fall, led by lower food and goods price inflation. Most measures added: outlook, the dynamics of underlying inflation removed: are easing, added: and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady. Since the Governing Council meeting in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons. Monetary policy has kept financing conditions restrictive. By dampening demand and keeping inflation expectations well anchored, this has made a major contribution to bringing inflation back down.

added: At the same time, despite the progress over recent quarters, domestic price pressures remain strong as wage growth is removed: gradually moderating, added: elevated, and removed: firms are absorbing part added: inflation is likely to stay above target well into next year. The latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections. Staff now see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. For inflation excluding energy and food, staff project an average of removed: the rise added: 2.8% in removed: labour costs added: 2024, 2.2% in removed: their profits. Financing conditions remain restrictive added: 2025 and removed: the past interest rate increases continue added: 2.0% in 2026. Economic growth is expected to removed: weigh on demand, which is helping added: pick up to removed: push down inflation. But domestic price pressures are strong added: 0.9% in 2024, 1.4% in 2025 and removed: are keeping services price inflation high. added: 1.6% in 2026.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It removed: considers that the key ECB interest rates are at levels that are making a substantial contribution to the ongoing disinflation process. The Governing Council’s future decisions will removed: ensure that its added: keep policy rates removed: will stay sufficiently restrictive for as long as removed: necessary. If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were added: necessary to removed: further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction. In any event, the added: achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of removed: restriction, added: restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and removed: it added: financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.

added: The Governing Council today also confirmed that it will reduce the Eurosystem’s holdings of securities under the pandemic emergency purchase programme (PEPP) by €7.5 billion per month on average over the second half of the year. The modalities for reducing the PEPP holdings will be broadly in line with those followed under the asset purchase programme (APP).

Key ECB interest rates

The added: Governing Council decided to lower 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 removed: remain unchanged at 4.50%, 4.75% added: be decreased to 4.25%, 4.50% and removed: 4.00% respectively. added: 3.75% respectively, with effect from 12 June 2024.

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.

The Governing Council removed: intends to added: will continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP removed: during added: until the removed: first half added: end of added: June 2024. Over the second half of the year, it removed: intends to added: will 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.

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.

***

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.