The representatives of the European Central Bank, as expected, took a break today after the June interest rate cut and will wait for the latest macroeconomic data. The market predicts their haircut in September.
"Today the Governing Council decided not to change any of the ECB's three main interest rates. The incoming information broadly confirms the Governing Council's previous assessment of the medium-term inflation outlook. While some indicators of core inflation increased slightly in May due to one-off factors, most indicators were either unchanged or slightly decreased in June. As expected, earnings moderated the inflationary impact of strong wage growth. Financing conditions remain tight due to ongoing monetary policy. On the other hand, domestic price pressure is still high, the level of service prices has risen, and general inflation is likely to exceed the target level for a considerable part of next year as well," the ECB statement reads.
Thus, the base interest rate will continue to be 4.25 percent, deposits held by commercial banks at the Central Bank will continue to be subject to an interest rate of 3.75 percent, and marginal borrowing will be 4.5 percent.
It is emphasized that the Governing Council is determined to ensure that inflation returns in time to the target level of 2 percent in the medium term. It will keep monetary policy interest rates at sufficiently restrictive levels for as long as necessary to achieve this objective. Decisions on the appropriate level and duration of restriction will continue to be made by the Governing Council on a case-by-case basis, based on available data. First of all, it will take decisions on interest rates after assessing the inflation outlook, taking into account the incoming economic and financial data, the evolution of core inflation and the extent of transmission of monetary policy effects. The Governing Council is not pre-committed to any specific direction of interest rate developments.
As for the Asset Purchase Program (APP), its portfolio is shrinking at a set and predictable pace, as the Eurosystem no longer reinvests the principal amounts received from the securities as they mature.
At the same time, the Eurosystem no longer reinvests all principal amounts resulting from the redemption of securities purchased under the Special Pandemic Purchase Program (SPPP) at maturity. Thus, the SPPP portfolio is reduced after an average of 7.5 billion. euros per month. The Governing Council intends to end reinvestment under the SPPP at the end of 2024. It will continue to maintain flexibility in the reinvestment of the proceeds from the redemption of securities purchased under the SPPP upon maturity in order to mitigate the pandemic-related risk to the monetary policy transmission mechanism.
The ECB announces that as banks return funds borrowed through targeted longer-term refinancing operations, the Governing Council will regularly assess the impact of targeted lending operations and the repayment of amounts borrowed under them on its monetary policy stance.
"The Governing Council is ready to adjust all the measures available under its mandate to return inflation to the target level of 2 percent over the medium term and to ensure a smooth transmission of the effects of monetary policy." In addition, a policy transmission buffer can be used to combat unwanted, disorderly market developments that could seriously disrupt the transmission of monetary policy across euro area countries. This would help the Governing Council to more effectively carry out the mandate given to it to ensure price stability" – we write in the statement of the Central Bank of the Eurozone.
During the press conference, the head of the ECB, Christine Lagarde, emphasized that today's decision to keep interest rates unchanged was taken unanimously. The latest macroeconomic data will continue to be closely monitored and decisions on the monetary policy direction will be taken on a case-by-case basis. There is no preconceived notion of what the representatives of the ECB will do during the next meeting, which is scheduled for the twelfth of September in Frankfurt.
The market is currently expecting the European Central Bank to make two more 25 basis point cuts this year, in September and December, with a break during the central bank's October meeting.
