Comparing the ECB August statement to the September statement

18 July12 September
2024

The Governing Council today decided to keeplower
the three key ECB interest rates unchanged. The
incoming information broadly supportsdeposit facility
rate – the rate through which it steers the monetary policy stance – by 25
basis points. Based on the Governing Council’s previousupdated
assessment of the medium-term inflation outlook.
While some measures, the dynamics
of underlying inflation tickedand the strength
of monetary policy transmission, it is now appropriate to take another step in
moderating the degree of monetary policy restriction.

Recent inflation data have come in broadly as
expected, and the latest ECB staff projections confirm the previous inflation
outlook. Staff see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and
1.9% in 2026, as in the June projections. Inflation is expected to rise again
in the latter part of this year, partly because previous sharp falls in energy
prices will drop out of the annual rates. Inflation should then decline towards
our target over the second half of next year. For core inflation, the projections
for 2024 and 2025 have been revised up in May owing to
one-off factors, most measures were either stable or edged down in June. In
line with expectations, the inflationaryslightly, as
services inflation has been higher than expected. At the same time, staff
continue to expect a rapid decline in core inflation, from 2.9% this year to
2.3% in 2025 and 2.0% in 2026.

Domestic inflation remains high as wages are still
rising at an elevated pace. However, labour cost pressures are moderating, and
profits are partially buffering the impact of high wage growth
has been buffered by profits. Monetary policy is keeping financinghigher
wages on inflation. Financing conditions remain restrictive.
At the same time, , and economic
activity is still subdued, reflecting weak private consumption and investment.
Staff project that the economy will grow by 0.8% in 2024, rising to 1.3% in
2025 and 1.5% in 2026. This is a slight downward revision compared with the
June projections, mainly owing to a weaker contribution from domestic
price pressures are still high, services inflation
is elevated and headline inflation is likely to remain above the target well
into next year.demand over the
next few quarters.

The Governing Council is determined to ensure that inflation
returns to its 2% medium-term target in a timely manner. It will keep policy
rates sufficiently restrictive for as long as necessary to achieve this aim.
The Governing Council will continue to follow a data-dependent and
meeting-by-meeting approach to determining the appropriate level and duration
of restriction. In particular, its interest rate decisions will 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. The Governing Council is not pre-committing to a
particular rate path.

As announced on 13 March 2024, some changes to the
operational framework for implementing monetary policy will take effect from 18
September. In particular, the spread between the interest rate on the main
refinancing operations and the deposit facility rate will be set at 15 basis
points. The spread between the rate on the marginal lending facility and the
rate on the main refinancing operations will remain unchanged at 25 basis
points.

Key ECB interest rates

TheThe Governing
Council decided to lower the deposit facility rate by 25 basis points. The
deposit facility rate is the rate through which the Governing Council steers
the monetary policy stance. In addition, as announced on 13 March 2024
following the operational framework review, the spread between the
interest rate on the main refinancing operations and the interest rates on
the deposit facility rate will be set at 15 basis
points. The spread between the rate on the marginal lending
facility and the deposit facility rate on the main
refinancing operations will remain unchanged at 4.25%,
4.25 basis points. Accordingly, the deposit facility
rate will be decreased to 3.50%%.
The interest rates on the main refinancing operations and 3.75the
marginal lending facility will be decreased to 3.65% and 3.90%
respectively. The changes will take effect from 18 September
2024.

Asset purchase programme (APP) and pandemic emergency
purchase programme (PEPP)

The APP portfolio is declining at a measured and predictable
pace, as the Eurosystem no longer reinvests the principal payments from
maturing securities.

The Eurosystem no longer reinvests all of the principal
payments from maturing securities purchased under the PEPP, reducing the PEPP
portfolio by €7.5 billion per month on average. The Governing Council intends
to discontinue reinvestments under the PEPP at the end of 2024.

The Governing Council will continue applying flexibility in
reinvesting redemptions coming due in the PEPP portfolio, with a view to
countering risks to the monetary policy transmission mechanism related to the
pandemic.

Refinancing operations

As banks are repaying the amounts borrowed under the
targeted longer-term refinancing operations, the Governing Council will
regularly assess how targeted lending operations and their ongoing repayment
are contributing to its monetary policy stance.

***

The Governing Council stands ready to adjust all of its
instruments within its mandate to ensure that inflation returns to its 2%
target over the medium term and to preserve the smooth functioning of monetary
policy transmission. Moreover, the Transmission Protection Instrument is
available to counter unwarranted, disorderly market dynamics that pose a
serious threat to the transmission of monetary policy across all euro area
countries, thus allowing the Governing Council to more effectively deliver on its
price stability mandate.

This article was written by Greg Michalowski at www.forexlive.com.