In an effort to address persistent inflation concerns, the ECB has chosen to raise the three key ECB interest rates by 25 basis points.
The decision to increase rates reflects the Governing Council's updated evaluation of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. According to the June macroeconomic projections,
Eurosystem staff anticipate that headline inflation will average 5.4% in 2023, 3.0% in 2024, and 2.2% in 2025. While indicators of underlying price pressures remain robust, there are some initial indications of softening.
Consequently, projections for inflation excluding energy and food have been revised upward for this year and next, primarily due to past surprises and the implications of a robust labor market on the speed of disinflation. Projections now indicate a rise to 5.1% in 2023, followed by a decline to 3.0% in 2024 and 2.3% in 2025. Economic growth projections for the same periods have been slightly lowered, with expectations of 0.9% growth in 2023, 1.5% in 2024, and 1.6% in 2025.
The previous rate increases implemented by the Governing Council have begun to impact financing conditions, transmitting effects throughout the economy. Borrowing costs have steeply risen, resulting in a slowdown in loan growth. These tighter financing conditions are a significant contributing factor to the expected decline in inflation, as they are projected to progressively dampen demand.
The Governing Council remains committed to achieving a timely return of inflation to its medium-term target of 2%. To this end, future decisions will aim to bring the key ECB interest rates to sufficiently restrictive levels. These rates will be maintained for as long as necessary to support the desired outcome.
The Governing Council will continue its data-dependent approach in determining the appropriate level and duration of these restrictions. Factors considered in interest rate decisions include the inflation outlook, incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.
Additionally, the ECB announced the discontinuation of reinvestments under the asset purchase program, effective July 2023.
Consequently, the three key ECB interest rates will be raised by 25 basis points. The interest rate on main refinancing operations will increase to 4.00%, the rate on the marginal lending facility will rise to 4.25%, and the interest rate on the deposit facility will be adjusted to 3.50% as of June 21, 2023.
The impact of these monetary policy changes has influenced European markets, leading to a slight decline as investors analyze the implications of the ECB's decision. (ILKHA)