European central bank raises interest rates.
15 june of 2023.
On June 15, 2023, the Governing Council made significant monetary policy decisions based on the current economic conditions. Despite a decrease in inflation, it’s anticipated that inflation will remain higher than desired for an extended period. In order to bring inflation back to the targeted 2% level, the Governing Council has chosen to increase the three key ECB interest rates by 25 basis points.
This rate adjustment reflects the council’s revised evaluation of inflation trends, underlying inflation dynamics, and the effectiveness of monetary policy transmission. According to the latest macroeconomic forecasts, Eurosystem experts predict headline inflation to average 5.4% in 2023, 3.0% in 2024, and 2.2% in 2025. While underlying price pressures remain strong, some indications suggest a possible softening. Forecasts for inflation excluding energy and food have been revised upwards due to past surprises and the implications of a robust labor market on the pace of disinflation.
Economic growth projections have been slightly revised downward for the current and upcoming years, with growth expected to be 0.9% in 2023, 1.5% in 2024, and 1.6% in 2025. Past rate increases are now actively influencing financing conditions, leading to increased borrowing costs and a slowdown in loan growth. These tighter financing conditions are expected to contribute to the projected decline in inflation, as they are anticipated to dampen demand.
The Governing Council’s future actions will strive to maintain key ECB interest rates at levels that promote a timely return of inflation to the 2% target. These rates will be sustained for as long as necessary. The council remains committed to data-dependent decision-making, considering economic and financial data, underlying inflation trends, and the effectiveness of monetary policy transmission.
The asset purchase program (APP) will no longer include reinvestments as of July 2023, while the pandemic emergency purchase program (PEPP) will continue to reinvest principal payments from maturing securities until at least the end of 2024. Flexibility will be exercised in reinvesting PEPP redemptions to counter risks related to the pandemic’s impact on the monetary policy transmission mechanism.
The Governing Council remains prepared to adjust its instruments as necessary to ensure inflation returns to its 2% target and to safeguard the smooth functioning of monetary policy transmission. The Transmission Protection Instrument is available to address disruptive market dynamics that could threaten policy transmission across the euro area. Further details about these decisions will be provided by the President of the ECB during a press conference today at 14:45 CET.
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