European Central Bank maintains 3 key interest rates

The Governing Council's decision comes amidst a backdrop of fluctuating inflation rates. Recent months have seen a drop in inflation, but projections indicate a temporary increase in the near term. The latest Eurosystem staff projections suggest a gradual decline in inflation over the next year, with expectations to align with the Governing Council’s 2 per cent target by 2025. The projections show an average headline inflation of 5.4 per cent in 2023, decreasing to 2.7 per cent in 2024, and further to around 2 per cent in 2025 and 2026, the Council said in a press release.

Interestingly, underlying inflation has shown a decrease, yet domestic price pressures, primarily driven by significant growth in unit labour costs, remain high. Inflation excluding energy and food is projected to be around 5.0 per cent in 2023, gradually declining in the following years.

The impact of past interest rate increases is becoming increasingly evident, with tighter financing conditions leading to subdued demand, subsequently aiding in the reduction of inflation. However, economic growth is expected to remain modest in the short term. The Eurosystem staff anticipates a recovery driven by rising real incomes, due to decreasing inflation and increasing wages, along with improving foreign demand. Growth forecasts are set at an average of 0.6 per cent for 2023, rising to 0.8 per cent in 2024 and reaching 1.5 per cent in the subsequent years.

The Governing Council remains committed to ensuring that inflation returns to its 2 per cent medium-term target promptly. The current assessment suggests that maintaining the key ECB interest rates at their present levels for a sufficient duration will significantly contribute to achieving this goal. Future policy decisions will be aimed at ensuring that the rates remain at sufficiently restrictive levels for as long as necessary.

Adopting a data-dependent approach, the Governing Council will continue to calibrate the level and duration of restriction based on ongoing economic and financial data assessments. Interest rate decisions will be particularly influenced by the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission.

Additionally, the Governing Council has resolved to advance the normalisation of the Eurosystem’s balance sheet. This includes full reinvestment of principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) during the first half of 2024, followed by a planned reduction of the PEPP portfolio by an average of €7.5 billion per month in the latter half of the year. The Council intends to discontinue reinvestments under the PEPP by the end of 2024, the release added.

Fibre2Fashion News Desk (KD)