He Governing Council of the European Central Bank (ECB) has decided Increase of the three official interest rates by 25 points, as announced by the institution, which has warned that the “inflation outlook” is too high for too long. As a result, the interest rate of the main financing operations and the interest rates of the marginal lending facility and the deposit facility will increase to 3.75%, 4.0% and 3.25%, respectively, effective May 10, 2023.
The institution, led by Christine Lagarde, began raising interest rates in July 2022 and has since raised them seven times in a row from 0% to the current 3.75%.
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The Governing Council stresses that, overall, “the information available broadly supports the assessment of the medium-term outlook for inflation,” which it made at its last meeting. “Headline inflation has been declining in recent months, but underlying price pressures remain strong.” At the same time “Previous rate hikes will be strongly transmitted to euro area financial and monetary conditions, while the delays and intensity of transmission to the real economy remain uncertain.”
Future ECB decisions will ensure that key interest rates are set at “sufficiently restrictive levels” to ensure a timely return of inflation to the 2% medium-term target and remain at these levels for as long as necessary. The Governing Council will continue to “apply a data-driven approach to determine the appropriate level and duration of the restriction.” In particular, “the Governing Council’s decisions on official interest rates will continue to be based on its assessment of the inflation outlook in the light of received economic and financial data, the underlying inflation dynamics and the strength of monetary policy transmission”.
balance sheet contraction
In parallel, the ECB will continue to reduce the portfolio of the Eurosystem’s asset purchase program (APP) at a moderate and predictable pace. In line with these principles, the Governing Council intends to do so Discontinue reinvestments under the APP from July 2023.
With regard to the PEPP emergency program launched during the pandemic, the Governing Council plans to reinvest the principal payments of maturing securities purchased under the program until at least the end of 2024. In any case, the future renewal of the PEPP portfolio will be managed in a way that does not compromise the appropriate monetary policy stance.
The institution promises that it will continue to apply flexibility in reinvesting due repayments into the PEPP portfolio to offset risks to the monetary policy transmission mechanism.