Monetary policy decisions

On 26 October 2023, the ECB’s Governing Council made key monetary policy decisions. They chose to maintain the three primary ECB interest rates unchanged:
– the interest rate on the main refinancing operations at 4.50%;
– the marginal lending facility interest rate at 4.75%; and
– the deposit facility interest rate at 4.00%.
The council’s assessment of the medium-term inflation outlook remained consistent, with expectations of elevated inflation due to strong domestic price pressures. However, September saw a notable drop in inflation, primarily due to strong base effects, and most indicators of underlying inflation continued to ease. Past interest rate increases have significantly affected financing conditions, curbing demand and contributing to lower inflation.
The Governing Council is committed to achieving its 2% medium-term inflation target. They believe that maintaining the current interest rate levels for an extended period will substantially contribute to this goal. Future decisions will keep policy rates at sufficiently restrictive levels for as long as necessary.
The council will follow a data-dependent approach for determining the appropriate level and duration of restriction, with a focus on the inflation outlook, economic and financial data, underlying inflation dynamics, and monetary policy transmission strength.
Regarding asset purchase programs, the APP portfolio is gradually declining as principal payments from maturing securities are no longer reinvested. For the PEPP, the council intends to reinvest principal payments until at least the end of 2024, managing the roll-off to avoid interfering with monetary policy. The council will maintain flexibility in reinvesting redemptions in the PEPP portfolio to counter risks related to the pandemic’s impact on the monetary policy transmission mechanism.
Furthermore, the Governing Council is prepared to adjust all instruments within its mandate to achieve the 2% inflation target and ensure the smooth operation of monetary policy. The Transmission Protection Instrument is available to counter market dynamics that threaten policy transmission across Eurozone countries, ensuring the delivery of price stability. These decisions are pivotal for the region’s economic stability.
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In a Q&A session on the above Monetary policy statement, Christine Lagarde, President of the ECB, and Luis de Guindos, Vice-President of the ECB, answered questions from the audience. The main topics covered a range of issues including yields, inflation, data dependency, external factors, capital injections, bank lending, economic forecasts, personal reflections, and the interpretation of the decision and debate within the Governing Council. Here an overview:
Yields and potential fragmentation in the euro area: The rise in yields and potential fragmentation in the euro area, possibly influenced by other regions like the United States, were discussed. The concern was raised about the impact of rising yields on financing conditions and the potential impact on the real economy and inflation.
Data dependency and monetary policy decisions: The importance of being data-dependent in making monetary policy decisions was emphasized. The ECB stated that they will continue to assess the inflation outlook, underlying inflation, and the strength of monetary policy transmission. The decision to hold rates steady was based on the current assessment of the situation.
Potential impact of external factors: The potential impact of external factors, such as conflicts in the Middle East, on energy costs and inflation was discussed. The ECB acknowledged that external tightening elements, including long-term yields and rates, can impact the euro area economy.
PEPP reinvestments: The topic of PEPP reinvestments was mentioned, but it was clarified that it was not discussed in this particular meeting.
Capital injections for central banks: The need for capital injections for eurozone central banks was mentioned, but it was stated that each central bank’s situation is different and there is no one-size-fits-all solution. The focus of the ECB and national central banks is on price stability and monetary policy, rather than showing profits or covering losses.
ECB’s assessment of economic forecasts: The ECB’s assessment of economic forecasts and whether they might be too optimistic was discussed. The ECB stated that growth has weakened and PMI numbers indicate weak growth. The topic of revisiting forecasts in the next monetary policy meeting was mentioned.
Bank lending and transmission mechanism: The issue of bank lending and the transmission mechanism was raised. The ECB clarified that their role is to set the rates at which banks and institutions finance themselves, and it is not their role to set lending rates or deposit rates. Solutions for issues related to lending rates are addressed by authorities, consumers, or competition authorities.
Personal reflections and regrets: The ECB President was asked about any regrets or proud moments during her mandate. She expressed no regrets and highlighted the quality of debates and exchanges within the Governing Council. The topic of bank taxes was also mentioned, with the ECB’s assessment being that such taxes should not impair lending, credit growth, or bank solvency.
Interpretation of the decision and debate: The interpretation of the decision to hold rates and the debate within the Governing Council was discussed. It was clarified that the decision was unanimous and there was a well-shared assessment of the current situation. The ECB emphasized the importance of being data-dependent and assessing the three criteria for inflation and monetary policy transmission.