At its monetary policy meeting in Frankfurt on Thursday 15 June, the Governing Council of the European Central Bank (ECB) decided to raise the ECB’s three key interest rates by 25 basis points. ECB President Christine Lagarde said that while inflationary pressures had eased, projections indicated that inflation rates could remain too high for too long.
On 21 June, the interest rates on the main refinancing operations will therefore be raised to 4%, the rates on the marginal lending facility to 4.25% and the rates on the deposit facility to 3.5%.
However, Ms Lagarde once again indicated that the ECB still had some ground to cover, adding that unless there was a material change in its baseline, it was highly likely that the ECB would raise rates again in July.
President Lagarde declined to comment on the terminal rate, saying that the ECB’s deliberations were motivated by the medium-term inflation target of 2%.
In addition, the ECB has confirmed that reinvestments under its Asset Purchase Programme (APP) will cease from July 2023. The President indicated that the ECB would remain attentive, but that she had reason to believe that this would be well absorbed by the market.
With regard to the Pandemic Emergency Purchase Programme (PEPP), the ECB’s latest piece of forward guidance on monetary policy, reinvestments will continue until at least the end of 2024 with flexibility, “if and where it is needed”.
In addition, at the end of the month, banks are expected to complete their scheduled repayment of €477 billion of loans obtained under TLTRO lll.
Monetary decisions will be guided by a data-dependent approach and based on an examination of the inflation outlook, taking into account economic and financial data, the dynamics of underlying inflation and the strength of the transmission of the ECB’s monetary policy.
In this regard, Christine Lagarde stated that previous tightening decisions were being passed on “vigorously” to financing conditions.
Macroeconomic projections
Ms Lagarde indicated that the analysis of the Eurosystem’s economic projections had been at the centre of this June meeting.
According to the Eurosystem’s June macroeconomic projections, headline inflation should average 5.4% in 2023, falling to 3.0% in 2024 and 2.2% in 2025.
The Eurosystem has slightly raised its forecasts for core inflation, notably “due to the vitality of the labour market”, and estimates that it will average 5.1% in 2023, falling to 3.0% in 2024 and 2.3% in 2025.
June’s growth projections have also been revised downwards for 2023 and 2024. The Eurosystem expects GDP growth to reach 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.
In addition, Ms Lagarde indicated that a great deal of time had been devoted to labour market data “because it is becoming one of the main components of the drivers of inflation”. The President stated that the ECB was looking at the dynamics around unit labour costs, which have an impact on inflation, “and it is especially important because it is many services which are playing a large part in our economy are labour intensive, and wages in that respect play a key role”.
However, Christine Lagarde said that for the time being she could not see a “price-wage” spiral.
She added that it was up to the social partners to decide on the way forward, but that it was preferable for companies and employees to avoid seeking, in their negotiations, full compensation in response to inflation, which could lead to second-round effects.
Link to the decisions: https://aeur.eu/f/7im (Original version in French by Émilie Vanderhulst)