ECB holds interest rates steady amid falling inflation projections

07 Mar '24

2 min read

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The European Central Bank (ECB) has announced that it will maintain the current interest rates, with the main refinancing operations rate at 4.50 per cent, the marginal lending facility rate at 4.75 per cent, and the deposit facility rate at 4.00 per cent. This decision follows a period of observation since the last Governing Council meeting in January, during which inflation rates have shown a downward trend.

The latest projections from ECB staff indicate a decrease in inflation expectations, particularly for 2024, largely due to a reduced impact from energy prices. The revised forecasts suggest that inflation will average 2.3 per cent in 2024, declining to 2.0 per cent in 2025, and further to 1.9 per cent in 2026. Inflation rates excluding energy and food are also expected to decrease, with an average of 2.6 per cent in 2024, 2.1 per cent in 2025, and 2.0 per cent in 2026.

Despite the easing of most underlying inflation measures, domestic price pressures remain significant, partly driven by strong wage growth. The ECB's report acknowledges that restrictive financing conditions and the impact of previous interest rate hikes are curbing demand, contributing to the reduction in inflation. Growth projections for the euro area have been adjusted downward to 0.6 per cent for 2024, with a modest recovery expected in the following years, projecting growth rates of 1.5 per cent in 2025 and 1.6 per cent in 2026, the ECB said in a press release.

The Governing Council emphasises its commitment to returning inflation to the 2 per cent medium-term target promptly. It believes that maintaining the current interest rate levels for a sufficient duration will significantly contribute to achieving this target. Future policy decisions will be designed to ensure that interest rates remain at levels that are restrictive enough to control inflation effectively.

The ECB asserts its continued data-dependent approach in determining the optimal level and duration of monetary restriction. The Governing Council's decisions on interest rates will be guided by ongoing assessments of the inflation outlook, considering economic and financial data, underlying inflation dynamics, and the efficacy of monetary policy transmission.

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