The European Central Bank (ECB) has held interest rates and said it expects inflation to decline over the course of 2024.
ADVERTISEMENTIn a highly anticipated move, the Governing Council of the European Central Bank (ECB) announced today its decision to maintain the current key interest rates, with no changes to the main refinancing operations at 4.50%, the marginal lending facility at 4.75%, and the deposit facility at 4.00%.
This decision marks the second consecutive meeting where the ECB has opted for unchanged interest rates, possibly signaling the conclusion of the hiking cycle initiated in July 2022. It comes shortly after the Federal Reserve's similar decision to keep rates steady during its Wednesday meeting.
"While inflation has recently exhibited declines, a temporary upswing is expected in the near future," stated the ECB in its announcement.
The latest Eurosystem staff projections paint a picture of a gradual decline in inflation and growth for the euro area in the coming year.
According to these projections, headline inflation is predicted to average 5.4% in 2023, decreasing to 2.7% in 2024, further dropping to 2.1% in 2025, and ultimately stabilizing at 1.9% in 2026. These downward revisions, particularly for 2024, represent a shift from the earlier September estimates of 3.4%.
When excluding energy and food prices, core inflation is expected to average 5.0% in 2023, decrease to 2.7% in 2024, further decline to 2.3% in 2025, and finally stabilize at 2.1% in 2026.
The ECB maintains its outlook for economic growth in the short term, projecting continued subdued conditions. However, there is some optimism for a forthcoming recovery, driven by rising real incomes and improved foreign demand.
Turning to the reduction of assets in the ECB's balance sheet, the Asset Purchase Programme (APP) continues to shrink at a controlled and predictable pace as the Eurosystem refrains from reinvesting principal payments from maturing securities.
Notably, the ECB has introduced plans to gradually reduce the PEPP (Pandemic Emergency Purchase Programme) portfolio by an average of €7.5 billion per month during the second half of 2024, with the intention to discontinue reinvestments under the PEPP by the end of that year. As of December 8, 2023, the ECB's most recent data indicates that PEPP holdings amounted to €1.670 billion.
In the wake of the ECB's decision, the euro saw a modest uptick, with the EUR/USD pair climbing to 1.0930. All eyes now shift towards the forthcoming press conference led by Christine Lagarde, where additional insights into the central bank's future outlook and policy decisions are eagerly anticipated.
