The Governing Council of the European Central Bank (ECB) decided, at its monetary policy meeting in Frankfurt on Thursday 27 July, to raise its three key rates by a further 25 basis points, taking the view that inflation was continuing to decline but is still expected to remain too high for too long. Starting 2 August, the rate on the deposit facility will be raised to 3.75%, the rate on the main refinancing operations to 4.25% and the rate on the marginal lending facility to 4.50%.
ECB President Christine Lagarde stressed that the decision had been taken unanimously, with the determination to be data-dependent in order to bring medium-term inflation down to 2%.
In addition, the Governing Council decided to set the remuneration of minimum reserves at 0%.
This decision will preserve the effectiveness of the implementation of monetary policy by maintaining the same level of control over its stance, said the President. This change will come into effect at the start of the reserve maintenance period on 20 September.
A pause in the rise in interest rates?
The ECB is now considering the possibility of a pause in its successive rate hikes.
The President said that this possibility would be examined from September onwards, and then at each monetary policy meeting. This is not forward guidance: “the burden of proof is going to be on the data”, Christine Lagarde was keen to point out.
The decision will again be taken on the basis of the Governing Council’s assessment of the inflation outlook, the underlying inflation dynamics and the strength of the monetary policy transmission. All types of macroeconomic data will be taken into consideration.
Ms Lagarde indicated that in September, the Governing Council will have at its disposal the inflation projections drawn up by the ECB, two readings and a better understanding of the transmission of its monetary policy.
Furthermore, there will be no trade-off between interest rates and quantitative tightening, and interest rates will remain the ECB’s main and most effective tool, said its President: “Our driving force is the effect of our monetary policy on inflation”.
Inflation dynamics
The President pointed out that the drivers of inflation were changing: external sources of inflation were diminishing, while domestic inflationary pressures, particularly those exerted by rising wages and profit margins, remained strong and were becoming an increasingly important factor in inflation.
However, she indicated that there was no second-round effect or risk of such a phenomenon, for the time being at least, but that the ECB was keeping a particularly close eye on the services sector.
The Vice-President, Luis De Guindos, stressed that, as indicated in the report on financial stability, the ECB had paid attention to the fall in property prices, particularly commercial property. According to Mr De Guindos, this trend began before monetary policy was tightened, and is not being seen in residential property.
Transmission of ECB monetary policy
Christine Lagarde indicated that the transmission of the ECB's monetary policy was taking effect in the area of bank financing. Transmission to the wider economy is less obvious, but is beginning to be observed.
“It’s not surprising that there is less investment in general. This is the expected effect of the monetary policy stance we have defined. And this is precisely what will enable inflation to be brought back to its target level”, added President Lagarde.
Greening the portfolio
The President pointed out that, as Greenpeace had noted (see EUROPE 13230/24), the ECB was ceasing reinvestments under its asset purchase programme (APP). However, the ECB had undertaken to align its asset purchase programmes with the Paris Agreement.
Christine Lagarde said: “During 2023, we will develop the means and methods by which we will align ourselves with the Paris Agreement”.
Links to decisions: https://aeur.eu/f/89i ; https://aeur.eu/f/89j (Original version in French by Émilie Vanderhulst)