Monetary policy decisions

Monetary policy decisions

July 21, 2022

Today, in line with the Governing Council’s strong commitment to its price stability mandate, the Governing Council took further key steps to ensure that inflation returns to its 2% target over the medium term. The Governing Council decided to raise the three key ECB interest rates by 50 basis points and approved the Transmission Protection Instrument (TPI).

The Governing Council deemed it appropriate to take a more important first step on its path to normalizing key interest rates than that announced at its previous meeting. This decision is based on the updated inflation risk assessment by the Governing Council and the enhanced support provided by the TPI to the effective transmission of monetary policy. It will support the return of inflation to the Governing Council’s medium-term objective by strengthening the anchoring of inflation expectations and ensuring that demand conditions adjust to achieve its inflation target. medium term.

At the next meetings of the Governing Council, a further normalization of interest rates will be appropriate. Today’s frontloading of the exit from negative interest rates allows the Governing Council to move to a meeting-by-meeting approach to interest rate decisions. The future trajectory of the Governing Council’s key interest rates will continue to be data dependent and will help achieve its medium-term inflation target of 2%. As part of its policy standardization, the Board of Governors will assess options for remunerating excess liquidity.

The Governing Council considered that the establishment of the TPI was necessary to support the effective transmission of monetary policy. In particular, as the Governing Council pursues the normalization of monetary policy, the TPI will ensure that the monetary policy stance is transmitted smoothly across all euro area countries. The single monetary policy of the Governing Council is a prerequisite for the ECB to be able to fulfill its price stability mandate.

The TPI will complement the Governing Council’s toolkit and can be activated to counter unwarranted and disorderly market dynamics that seriously threaten the transmission of monetary policy in the euro area. The scale of TPI purchases depends on the severity of the risks facing policy transmission. Purchases are not limited ex ante. By preserving the transmission mechanism, the TPI will enable the Governing Council to fulfill its price stability mandate more effectively.

In any case, the flexibility of reinvestments of maturing redemptions in the portfolio of the Pandemic Emergency Purchase Program (PEPP) remains the first line of defense to counter the risks on the transmission mechanism linked to the pandemic.

The details of the TPI are described in a separate press release which will be published at 15:45 CET.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Consequently, the interest rate for the main refinancing operations and the interest rates for the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% respectively, with effect from July 27, 2022.

At the next meetings of the Governing Council, a further normalization of interest rates will be appropriate. Today’s frontloading of the exit from negative interest rates allows the Governing Council to move to a meeting-by-meeting approach to interest rate decisions. The future trajectory of the Governing Council’s key interest rates will continue to be data dependent and will help achieve its medium-term inflation target of 2%.

Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP)

The Governing Council intends to continue to reinvest, in full, the principal payments of maturing securities purchased under the APP for an extended period after the date on which it begins to raise interest rates. interests of the ECB and, in any case, for as long as necessary to maintain abundant liquidity conditions and an appropriate monetary policy.

With regard to the PEPP, the Board of Governors intends to reinvest the principal payments of maturing securities purchased under the program until at least the end of 2024. In any event, the future roll-off of the PEPP portfolio will be managed in such a way as to avoid any interference with the appropriate monetary policy.

Repayments falling due in the PEPP portfolio are reinvested in a flexible manner, in order to counter the risks on the transmission mechanism linked to the pandemic.

Refinancing operations

The Governing Council will continue to monitor banks’ funding conditions and ensure that the maturity of operations under the third series of Targeted and Smooth Longer-Term Refinancing Operations (TLTRO III) does not not impede the transmission of its monetary policy. The Governing Council will also regularly assess how targeted lending operations contribute to the stance of its monetary policy.

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The Governing Council stands ready to adjust all its instruments within its mandate to ensure that inflation stabilizes at its medium-term target of 2%. The Governing Council’s new TPI will ensure the smooth transmission of its monetary policy stance across the euro area.

The ECB President will comment on the considerations behind these decisions at a press conference from 2:45 p.m. CET today.

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