The ECB has decided to maintain its key interest rates, leaving the main refinancing operations rate at 4.25%, the marginal lending facility rate at 4.50%, and the deposit facility rate at 3.75%. This decision comes after the Governing Council meeting, where they assessed the medium-term inflation outlook.
Recent data supports the ECB's previous evaluations. While some measures of underlying inflation increased in May due to one-off factors, most measures either stabilized or declined in June. The inflationary impact of high wage growth has been mitigated by profits, and the restrictive financing conditions are being maintained. Despite these factors, domestic price pressures and services inflation remain elevated, with headline inflation expected to stay above the target well into the next year.
The Governing Council emphasized its commitment to bringing inflation back to its 2% medium-term target. They will keep policy rates sufficiently restrictive for as long as necessary to achieve this goal. The ECB will continue to adopt a data-dependent approach, assessing the inflation outlook based on economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission.
The ECB also provided updates on its asset purchase programmes, including the asset purchase programme (APP) and the pandemic emergency purchase programme (PEPP). The APP portfolio is declining at a measured and predictable pace, with the Eurosystem no longer reinvesting principal payments from maturing securities. For the PEPP, the Eurosystem is reducing the portfolio by an average of €7.5 billion per month by not reinvesting all principal payments from maturing securities. Reinvestments under the PEPP are expected to be discontinued by the end of 2024. However, the ECB will apply flexibility in reinvesting redemptions in the PEPP portfolio to mitigate risks to the monetary policy transmission mechanism related to the pandemic.
The ECB will continue to assess how the ongoing repayments of targeted longer-term refinancing operations (TLTROs) are contributing to its monetary policy stance. The Governing Council affirmed its readiness to adjust all its instruments within its mandate to ensure that inflation returns to the 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. The Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that threaten the transmission of monetary policy across euro area countries. (ILKHA)