The European Central Bank (ECB) has decided to maintain its key interest rates unchanged for the second consecutive time, emphasizing that the current rates are at a restrictive level that will further suppress demand and help reduce inflation.
On December 14, the ECB announced its latest interest rate decision, keeping the three main rates steady at their historic highs: the main refinancing rate at 4.5%, the deposit facility rate at 4%, and the marginal lending rate at 4.75%.
Since ending its eight-year negative interest rate era in July last year, the ECB has raised interest rates ten times in a row, totaling a 450 basis point increase, marking the fastest tightening pace in its history.
The ECB's rate statement noted that although inflation has declined in recent months, it may rebound slightly in the short term. The past rate hikes continue to strongly influence financing conditions, further suppressing demand and thereby helping to reduce inflation.
Simultaneously, the ECB revised its inflation forecasts downward: it now expects the inflation rate in Europe to be 2.7% in 2024, down from the 3.2% projected in September; the inflation rate for 2025 is forecasted at 2.1%, unchanged from September's prediction; and the inflation rate for 2026 is projected at 1.9%.
Given the general weakness of the Eurozone economy, the ECB also lowered its GDP growth forecasts: it now expects a GDP growth rate of 0.6% in 2023, down from the previously forecasted 0.7%; a GDP growth rate of 0.8% in 2024, down from the earlier projection of 1%; and a GDP growth rate of 1.5% in 2025, consistent with previous estimates.
Recent data showed that the Eurozone's harmonized CPI in November increased by 2.4% year-over-year, cooling more than expected, with a month-over-month preliminary value of -0.5%, the largest drop since January 2020, lower than the expected -0.2% and below the previous value of 0.1%.
Progress on inflation may also have influenced the decision regarding the PEPP. The ECB stated that it plans to stop reinvesting under the PEPP at the end of 2024, continuing PEPP reinvestments in the first half of 2024 and planning to phase out the PEPP reinvestment program in the second half of the year at an average monthly reduction rate of 7.5 billion euros.
Several members of the ECB's Governing Council have already expressed support for "starting to scale back the PEPP earlier." Last week, one of the Governing Council members, the Governor of the Austrian Central Bank, Holzmann, said he favored discussing this at the December policy meeting and gradually reducing reinvestments starting in March next year.
Regarding the future path of interest rates, the ECB stated that its decisions will continue to be data-driven, based on an assessment of the inflation outlook, ensuring that inflation returns to the 2% target level in a timely manner. The ECB's Governing Council believes that maintaining key interest rates at a high level for a sufficient length of time will contribute to achieving the inflation target.
Following the announcement of the interest rate decision, the euro briefly rose over 10 points against the U.S. dollar, currently trading at 1.0924. Market expectations for an ECB rate cut decreased from 156 basis points before the decision to 154 basis points.
