ECB: Unchanged retained interest rates for another month

The European Central Bank remained stable for another month at its meeting in March with a communication published on Thursday (7.3.2024), and revised its inflation forecasts in particular for 2024, which mainly reflects the lowest contribution of energy prices. The interest rate on the ECB’s main refinancing operations and interest rates on the marginal lending facility and deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively. The ECB now predicts that inflation will average 2.3% in 2024, 2% in 2025 and 1.9% in 2026. Structural inflation excluding energy and food has also been revised downwards and an average of 2.6% for 2024, 2.1% for 2025 and 2% for 2025. The ECB has once again reiterated its determination to ensure that inflation returns to the medium-term target of 2% in time. On the basis of its current assessment, the Governing Council considers that the ECB’s core interest rates are at levels which, for a long time, will contribute substantially to this objective. Future Governing Council decisions will ensure that policy rates are set at sufficiently restrictive levels for as long as necessary, and will continue to depend on data. The announcement states that although most of the underlying inflation indicators have further declined, domestic price pressures remain high, partly due to the sharp increase in wages. However, a downward review was provided by bank analysts and its forecast for growth for 2024 at 0.6%, with economic activity expected to remain sluggish in the near future. The economy is then expected to recover and grow by 1.5% in 2025 and 1.6% in 2026, initially supported by consumption and later and by investments. The ECB says that the financing conditions are restrictive and the previous interest rates increases continue to burden demand, which helps to reduce inflation. As regards the APP portfolio it will continue to decrease at a measured and predictable rate, as capital from maturity instruments is no longer reinvested. The Board intends to continue to fully reinvest principal payments from maturity instruments purchased under PEPP in the first half of 2024. During the second half of the year, it plans to reduce the PEPP portfolio by EUR 7.5 billion per month on average while the Board plans to discontinue reinvestments under PEPP at the end of 2024. It is said that the Governing Council of the ECB will continue to apply flexibility to the reinvestment of the acquisitions that will arise in the PEPP portfolio, in order to address the risks to the monetary policy transmission mechanism related to the pandemic.