ECB Holds Rates Steady, Reaffirms Commitment to 2% Inflation Target
As anticipated, the ECB chose to keep interest rates unchanged and provided a clear message for those seeking decisive guidance:
Here's the gist of it:
"The Governing Council is committed to bringing inflation back to its 2% medium-term target promptly. Policy rates will remain sufficiently restrictive for as long as needed to meet this goal. The Governing Council will continue to take a data-driven and meeting-by-meeting approach in determining the appropriate level and duration of these restrictive measures.
In particular, interest rate decisions will be guided by an assessment of the inflation outlook, based on incoming economic and financial data, the dynamics of underlying inflation, and the effectiveness of monetary policy transmission.
The Governing Council is not pre-committing to a specific rate path."
The assessment of inflation is fairly balanced, downplaying the rise in inflation measures in May.
On one hand, most underlying inflation indicators "were either stable or declined slightly in June," according to the ECB.
On the other hand, "domestic price pressures remain high, services inflation is elevated, and headline inflation is likely to stay above target well into next year."
The ECB also noted plans to reduce its PEPP portfolio by the second half of next year.
Following the decision, the euro remained stable against the dollar and yield curves were largely unchanged... a non-event...
Attention now shifts to the press conference for any indications that the ECB might cut rates again in September, when new staff projections for growth and inflation will be released.
Here are the scenarios if Lagarde gives any hints...
Watch Lagarde's press conference live here (starting at 0845ET)
Read the full statement below:
Monetary Policy Decisions
The Governing Council decided to keep the three key ECB interest rates unchanged. The incoming data largely support the Council's previous assessment of the medium-term inflation outlook. Although some measures of underlying inflation rose in May due to one-off factors, most measures were stable or decreased slightly in June. As expected, the inflationary impact of high wage growth has been offset by profits. Monetary policy remains restrictive. However, domestic price pressures are still high, services inflation is elevated, and headline inflation is likely to stay above the target well into next year.
The Governing Council is committed to ensuring inflation returns to its 2% medium-term target promptly. It will keep policy rates sufficiently restrictive for as long as needed to achieve this aim. The Council will continue to adopt a data-dependent and meeting-by-meeting approach in determining the appropriate level and duration of restrictions. Interest rate decisions will be based on the assessment of the inflation outlook, considering incoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. The Council is not pre-committing to a specific rate path.
Key ECB Interest Rates
The interest rate on main refinancing operations and the rates on the marginal lending facility and the deposit facility remain unchanged at 4.25%, 4.50%, and 3.75%, respectively.
Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP)
The APP portfolio is declining steadily as the Eurosystem no longer reinvests principal payments from maturing securities.
The Eurosystem is reducing the PEPP portfolio by €7.5 billion per month on average, by no longer reinvesting all principal payments from maturing securities purchased under PEPP. The Council plans to stop reinvestments under PEPP by the end of 2024.
The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, to counter risks to the monetary policy transmission mechanism related to the pandemic.
Refinancing Operations
As banks repay amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how these targeted lending operations and their ongoing repayments are contributing to its monetary policy stance.
Here's the gist of it:
"The Governing Council is committed to bringing inflation back to its 2% medium-term target promptly. Policy rates will remain sufficiently restrictive for as long as needed to meet this goal. The Governing Council will continue to take a data-driven and meeting-by-meeting approach in determining the appropriate level and duration of these restrictive measures.
In particular, interest rate decisions will be guided by an assessment of the inflation outlook, based on incoming economic and financial data, the dynamics of underlying inflation, and the effectiveness of monetary policy transmission.
The Governing Council is not pre-committing to a specific rate path."
The assessment of inflation is fairly balanced, downplaying the rise in inflation measures in May.
On one hand, most underlying inflation indicators "were either stable or declined slightly in June," according to the ECB.
On the other hand, "domestic price pressures remain high, services inflation is elevated, and headline inflation is likely to stay above target well into next year."
The ECB also noted plans to reduce its PEPP portfolio by the second half of next year.
Following the decision, the euro remained stable against the dollar and yield curves were largely unchanged... a non-event...
Attention now shifts to the press conference for any indications that the ECB might cut rates again in September, when new staff projections for growth and inflation will be released.
Here are the scenarios if Lagarde gives any hints...
Watch Lagarde's press conference live here (starting at 0845ET)
Read the full statement below:
Monetary Policy Decisions
The Governing Council decided to keep the three key ECB interest rates unchanged. The incoming data largely support the Council's previous assessment of the medium-term inflation outlook. Although some measures of underlying inflation rose in May due to one-off factors, most measures were stable or decreased slightly in June. As expected, the inflationary impact of high wage growth has been offset by profits. Monetary policy remains restrictive. However, domestic price pressures are still high, services inflation is elevated, and headline inflation is likely to stay above the target well into next year.
The Governing Council is committed to ensuring inflation returns to its 2% medium-term target promptly. It will keep policy rates sufficiently restrictive for as long as needed to achieve this aim. The Council will continue to adopt a data-dependent and meeting-by-meeting approach in determining the appropriate level and duration of restrictions. Interest rate decisions will be based on the assessment of the inflation outlook, considering incoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. The Council is not pre-committing to a specific rate path.
Key ECB Interest Rates
The interest rate on main refinancing operations and the rates on the marginal lending facility and the deposit facility remain unchanged at 4.25%, 4.50%, and 3.75%, respectively.
Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP)
The APP portfolio is declining steadily as the Eurosystem no longer reinvests principal payments from maturing securities.
The Eurosystem is reducing the PEPP portfolio by €7.5 billion per month on average, by no longer reinvesting all principal payments from maturing securities purchased under PEPP. The Council plans to stop reinvestments under PEPP by the end of 2024.
The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, to counter risks to the monetary policy transmission mechanism related to the pandemic.
Refinancing Operations
As banks repay amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how these targeted lending operations and their ongoing repayments are contributing to its monetary policy stance.
The Governing Council is prepared to adjust all of its instruments within its mandate to ensure inflation returns to its 2% target over the medium term and to maintain smooth monetary policy transmission. Additionally, the Transmission Protection Instrument is available to address unwarranted, disorderly market dynamics that threaten the transmission of monetary policy across all euro area countries, allowing the Council to more effectively deliver on its price stability mandate.