ECB hikes key rates by 25 bps as inflation outlook stays ’too high for too long’

In the midst of ongoing high inflation pressures, the European Central Bank on Thursday raised the three key interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively, with effect from 10 May 2023.

In its statement, ECB said, "the inflation outlook continues to be too high for too long." The central bank targets an inflation of 2%.

According to the central bank, headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.

ECB's future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.

Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the ECB formed at its previous meeting.

Apart from hiking interest rates, ECB will keep reducing the Eurosystem’s asset purchase programme (APP) portfolio at a measured and predictable pace. Accordingly, the central bank expects to discontinue the reinvestments under the APP as of July 2023.

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The Asset purchase programme (APP) is declining at a measured and predictable pace, as the Eurosystem does not reinvest all of the principal payments from maturing securities, it said.

ECB highlighted that the decline in APP will mount to €15 billion per month on average until the end of June 2023.

In case of the pandemic emergency purchase programme (PEPP), ECB said, "The Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance."

Additionally, ECB 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.

ECB will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.

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Also, ECB's future rate decisions will continue to be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.