ECB Holds Rates Steady Again, Cuts Inflation Outlook

(RTTNews) - The European Central Bank left its key interest unchanged for a second straight session, as expected, and the bank lowered its inflation projections for this year and next.

The Governing Council, led by ECB President Christine Lagarde, held the main refinancing rate, or refi, at 4.50 percent on Thursday, in the final rate-setting session this year.

The deposit facility rate was kept at a record high 4.00 percent and the lending rate was held at 4.75 percent.

"Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal," the ECB said. "The Governing Council's future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary."

The ECB had raised rates by a cumulative 400 basis points with hikes in every policy session of the latest tightening cycle that began in July last year. The central bank stuck to its forward guidance that policymakers will continue to follow a data-dependent approach in making future policy decisions.

"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 bank said.

The central bank expects inflation to pick up temporarily in the near term, but decline gradually during next year. The latest ECB Staff macroeconomic projections released on Thursday, revealed downward revision of the inflation outlook for this year and next. The bank now sees headline inflation at 5.4 percent this year, 2.7 percent next year, 2.1 percent in 2025 and 1.9 percent in 2026.

Core inflation has eased further, but domestic price pressures remain elevated, primarily owing to strong growth in unit labor costs, the ECB said. Inflation excluding energy and food was forecast to average 5.0 percent this year and 2.7 percent next year. Thereafter, the rate is seen easing to 2.3 percent in 2025 and 2.1 percent in 2026.

The ECB expects the Eurozone economy to recover as households benefit from rising real incomes and improving foreign demand. The bank expects growth to pick up from an average 0.6 percent for this year to 0.8 percent for 2024, and to 1.5 percent for both 2025 and 2026.

As part of its balance sheet normalization efforts, the ECB said it intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the pandemic emergency purchase program, or PEPP, during the first half of 2024. The bank plans to reduce the PEPP portfolio by EUR 7.5 billion per month during the second half of next year and to discontinue reinvestments at the end of 2024.