Frankfurt’s verdict – the Eurosystem’s economic outlook

It’s that exciting time again – the ECB’s main decision-making body, its Governing Council, has set the key interest rates in the euro area. The European Central Bank’s president, Christine Lagarde, announced in a press release last week the Governing Council’s latest outlook for monetary conditions within the Eurosystem, strongly stating the direction of monetary policy in the medium term.

Every six weeks, Frankfurt’s offices meet to assess where the Eurosystem is headed and what monetary policy decisions are to be implemented. Lagarde’s forward guidance inferred that the European economy was weak, having inflationary pressures caused by global economic downturn and geopolitical tensions. Energy and food prices – along with increasing business profit margins and unit labour costs – have lead to increasing inflation; underlying inflation (inflation that excludes energy and food costs) has, however, decreased in the third quarter due to energy shocks wearing off, suppliers becoming more resilient and tight monetary policy. With strong employment and ramping up economic activity across Europe, inflation pressures are likely to remain high.

The key monetary policy decisions are as follows: the ECB has decided to slow down and cut back on its purchases of maturing securities from the Pandemic Emergency Purchase Program (PEPP), indicative of a shift to a tightening monetary policy. Purchases will be gradually pulled back throughout 2024 and then discontinued by the end of the year.

As for key interest rates, the Governing Council has determined that the three current key rates don’t require alteration. The marginal lending facility – the rate at which Eurosystem banks can acquire overnight liquidity from central banks – will remain at 4.75%, whilst the marginal deposit facility – the rate at which banks can deposit – is set at 4%. The rate of main refinancing operations, the rate at which banks can acquire short-term liquidity week by week, is 4.5%. The ECB believes that maintaining these rates and asset purchase program cuts will lead to inflation returning to the target of 2% within mid-to-late 2025.