As widely expected, the European Central Bank kept interest rates unchanged at today’s board meeting.
Interest rates were last raised in September 2023 in the upward cycle that began in July 2022, with the deposit rate reaching 4%. In the next three meetings, the ECB consistently reiterated that interest rates would remain steady for a significant period of time in order to contribute to a steady reduction in inflation, calling any talk of easing monetary policy premature.
At the previous meeting, held in Ghent on March 7, its experts’ economic forecasts acknowledged that inflation had fallen faster than expected and therefore revised down their forecasts for inflationary pressures, mainly due to energy prices.
In the standard interview, ECB chief Christine Lagarde underlined that monetary policy will remain accommodative until there is certainty that inflationary risks have passed, underscoring the ECB’s commitment to achieving the 2% target. And he reiterated that the central bank is awaiting further data that will definitively demonstrate the de-escalation of prices.
Inflation
The board, while acknowledging progress on the inflation front, with most core inflation indicators on the downside, focused on domestic price pressures resulting in services inflation remaining high levels.”Most measures of core inflation are falling, the pace of wage growth is gradually moderating and businesses are absorbing some of the rise in labor costs into their profits. Financing conditions remain tight and past interest rate hikes continue to dampen demand, helping to push inflation down. But domestic price pressures are strong and are keeping service price inflation high. says the bank’s announcement.
We kept our interest rates unchanged at our latest meeting.
See our monetary policy decisions pic.twitter.com/rZ8Wex669f
— European Central Bank (@ecb) April 11, 2024
Eurozone inflation is now only marginally above the ECB’s 2% target. Inflation eased from a peak of 10.6% in 2022 to 2.4% in March. But market expectations for a rate cut were shaken by data this week that showed US inflation rose more than expected in March.
Both markets and economists still believe the ECB is likely to cut interest rates at its next meeting on June 6, given the weaker eurozone economy and waning price pressures. June is the first month in which central bankers will have full data on first-quarter wage negotiations – an area that raises concern about possible inflationary effects.
“The board is determined to ensure that inflation returns to the medium-term target of 2% in time. ” it is noted in the announcement “It considers that the key interest rates of the ECB are at levels that contribute significantly to the ongoing process of de-escalation of inflation. If the Governing Council’s updated assessment of the outlook for inflation, the dynamics of core inflation and the strength of monetary policy transmission further strengthened its belief that inflation is converging towards target in a sustained manner, it would be appropriate to reduce the current level of monetary policy tightening.”
In the last sentence of the announcement, it is considered by market players to be a sign of the ECB preparing to cut interest rates.
The ECB’s key interest rates
The interest rate of the main refinancing operations as well as the interest rates of the margin financing facility and the deposit acceptance facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.
The Asset Purchase Program (APP) and Pandemic Emergency Asset Purchase Program (PEPP)
The APP portfolio is being reduced at a measured and predictable pace, as the Eurosystem no longer reinvests principal amounts from redeeming securities at maturity.
“The board” according to the announcement “intends to continue to fully reinvest the capital amounts from the redemption of securities acquired under the PEPP program upon their maturity during the first half of 2024. During the second half of year, it intends to reduce the size of the PEPP portfolio by €7.5 billion per month on average. The Board intends to end reinvestments under the PEPP scheme at the end of 2024.
“The Governing Council will continue to apply flexibility in the reinvestment of amounts from the redemption of PEPP portfolio securities as they mature in order to address risks to the monetary policy transmission mechanism related to the pandemic.”
Source OT
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