Monetary policy decisions

On 15 June 2023, the ECB announced its monetary policy decisions in response to the persistent issue of high inflation. The Governing Council expressed concern about the projected elevated inflation for an extended period and decided to raise the three key interest rates by 25 basis points.
Indeed, Eurosystem staff’s June macroeconomic projections indicate that headline inflation is expected to average 5.4% in 2023, followed by 3.0% in 2024 and 2.2% in 2025. Projections for inflation excluding energy and food have been revised upward, with expectations of reaching 5.1% in 2023 before declining to 3.0% in 2024 and 2.3% in 2025.
While economic growth projections for the same period have been slightly downgraded, with anticipated growth rates of 0.9% in 2023, 1.5% in 2024, and 1.6% in 2025, the previous rate increases have effectively transmitted to increased borrowing costs and a deceleration in loan growth. These tighter financing conditions are expected to contribute to a decline in inflation by dampening demand.
The Governing Council’s decisions going forward will be focused on achieving the 2% medium-term inflation target. Interest rates will be adjusted to sufficiently restrictive levels and maintained as necessary. These decisions will be based on assessments of the inflation outlook, economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission.
Starting in July 2023, the ECB will discontinue reinvestments under the APP. Additionally, the three key ECB interest rates will be increased by 25 basis points, resulting in interest rates of 4.00% for main refinancing operations, 4.25% for the marginal lending facility, and 3.50% for the deposit facility, effective from 21 June 2023.
The ECB remains committed to adjusting all instruments within its mandate to ensure a return to the 2% inflation target over the medium term and to maintain the smooth functioning of monetary policy transmission. The Transmission Protection Instrument is available to address disorderly market dynamics that could hinder monetary policy transmission across all euro area countries.
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During a press conference, the President of the ECB provided further details on the considerations behind these decisions. The ECB is committed to continuing rate hikes and has not considered pausing or skipping rate rises. However, the ECB is monitoring core inflation, transmission strength, inflation outlook, and underlying inflation dynamics to determine the timing of a possible pause or skip, which may be considered in September.
The ECB is conscious of the potential negative impact of its policies on economic activity and is closely monitoring any weakening in growth. It also recognizes the effects of the repayment of TLTROs and the completion of APP reinvestment at the end of June. The ECB believes that these events will be absorbed smoothly by the markets, but stands ready to take action if necessary.
While the ECB has not observed second-round effects or a wage-price spiral, it remains concerned about unit labor cost and its impact on core inflation projections. The ECB is committed to bringing inflation back to 2% but is realistic and measured in its response, persistently delivering measures to reach its target.
Financial conditions are being carefully monitored, considering the impact of balance sheet reduction. The reimbursement of TLTROs at the end of June will reduce the ECB’s balance sheet by 477 billion, but the ECB expects this to have an insignificant impact on the markets.