The Governing Council of the European Central Bank (ECB) has decided to raise the ECB’s three key interest rates by a further 25 basis points. This is the tenth consecutive increase. On 20 September, the rate on the deposit facility will reach a historic low of 4%, the rate on the main refinancing operations will be 4.5% and the rate on the marginal lending facility will be 4.75%.
Are we moving towards a cap on rate levels? This time, the Governing Council indicated that it considered that “the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”.
The second factor is how long this restrictive policy will be maintained. The Governing Council indicated that “future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary”.
For ECB President Christine Lagarde, the focus is likely to be more on duration than on rate levels. However, she refused to say that a peak had been reached with these rate increases.
These decisions were taken by a solid majority, according to Mrs Lagarde. However, the President stressed that some governors would have liked to see a pause in restrictive monetary policy decisions, in order to better understand the impact of previous decisions.
More broadly, the Governing Council’s decision-making approach remains in line with the latest decisions (see EUROPE 13231/2): meeting after meeting, relying on a data-dependent approach to determine the degree and duration of this restrictive orientation, basing its assessment of the inflation outlook on economic and financial data, the dynamics of underlying inflation and the strength of its monetary policy transmission.
Macroeconomic projections
Mrs Lagarde described the meeting as a “projection meeting”.
As part of the September macroeconomic projections for the euro area, Eurosystem teams have revised up the HICP headline inflation forecasts for 2023 (5.6%) and 2024 (3.2%) due to the trajectory of energy prices. Forecasts for 2025 have been revised down slightly to 2.1%.
Underlying inflation (excluding energy and food) should remain high: the team forecasts an average of 5.1% in 2023, 2.9% in 2024 and 2.2% in 2025.
Economic growth forecasts have been revised downwards, with Eurosystem teams estimating that the evolving impact of tighter financing on domestic demand, as well as the international economic slowdown and lower demand for euro area exports, were holding back growth, “in particular due to lower investment in the residential and business sectors”.
Although the employment market remains robust, the services sector is also showing signs of slowing.
The ECB now expects gross domestic product growth in the euro area to reach 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.
Earlier in the week, the European Commission presented interim projections also indicating slower growth for 2023 (see EUROPE 13247/1).
The President felt that we were going through difficult times and that the recovery anticipated for 2023 had been pushed out to 2024. “We are confident that growth will pick up in 2024”, she stressed.
Monetary policy transmission
In the ECB’s view, previous interest rate rises decided by the Governing Council were still being transmitted forcefully, helping to dampen demand. “There is evidence that the current hiking cycle is transmitting to financing conditions faster than previous ones”, she added.
Christine Lagarde indicated that the objective was not to provoke a recession, but to pursue the mandate to guarantee price stability (the ECB’s objective is to achieve 2% inflation in the medium term and in a symmetric manner).
Greening the portfolio
Mrs Lagarde did not make any announcement on the greening of the ECB’s portfolio. She considered that, thanks to its tilting mechanism, the ECB was in line with the Paris Agreement until the end of 2023.
However, she indicated that with the end of reinvestments under the Asset Purchase Programme (APP) (see EUROPE 13202/6, 13230/24), and given the very limited volume of corporate bonds held under the Covid-A9 Pandemic Emergency Purchase Programme (PEPP), the ECB would be looking at this issue, and that ECB staff would be working to propose options to remain in compliance with the Paris Agreement.
Link to decisions: https://aeur.eu/f/8k6 (Original version in French by Émilie Vanderhulst)