The meeting of the European Central Bank’s governing council, its rate-setting body, on Thursday 25 January, largely adhered to standard proceedings. The council members maintained their commitment to the Euro area’s medium-term inflation target of 2%, in the decision to hold the rates steady for the third consecutive time, a move that was largely anticipated.
Christine Lagarde, president of the European Central Bank, stated that maintaining key bank rates at their current levels--which are the highest in two decades--forms a crucial part of the ECB’s strategy to reach the inflation target. During a press conference, she emphasised the importance of this decision in the current economic climate, underscoring the need to balance economic growth with inflation control.
Lagarde said that the governing council’s decision to keep the three key ECB interest rates unchanged was based on information confirming their previous assessment of the medium-term inflation outlook. Despite an upward base effect on headline inflation due to energy prices, the underlying inflation trend continues to decline. The ECB noted that past interest rate increases are being effectively transmitted into financing conditions, which in turn are dampening demand and aiding in reducing inflation.
Lagarde and the council expressed their determination to ensure that inflation returns to the 2% target in a timely manner. The council’s future decisions will aim to maintain policy rates at sufficiently restrictive levels for as long as necessary to achieve their inflation target, stated the press statement following the decision.
The ECB will continue to adopt a data-driven approach when determining the appropriate level and duration of restriction, stated Lagarde. As in previous instances, Lagarde reiterated that interest rate decisions will be based on assessments of the inflation outlook, considering incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.
As for the specific rates, the interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.
The Asset Purchase Programme (APP) portfolio is set to decline at a measured and predictable pace, with the Eurosystem ceasing to reinvest principal payments from maturing securities. For the Pandemic Emergency Purchase Programme (PEPP), the ECB intends to continue reinvesting the principal payments from maturing securities purchased under the programme during the first half of 2024. However, over the second half of the year, the council plans to reduce the PEPP portfolio by an average of €7.5bn per month. They intend to discontinue reinvestments under the PEPP by the end of 2024.
In addition, the ECB will apply flexibility in reinvesting redemptions due in the PEPP portfolio, aiming to counter risks related to the pandemic that may affect the monetary policy transmission mechanism.
The ECB’s next policy setting meeting is scheduled for 7 March.