The European Central Bank kept its three key policy rates unchanged on Thursday, leaving the deposit facility rate at a record 4.00%, the main refinancing rate at 4.50% and the marginal lending facility at 4.75%, as the Governing Council reiterated that rates were at levels that, maintained for a sufficiently long duration, would make a substantial contribution to returning inflation to the 2% medium-term target.

The decision, announced after the first Governing Council meeting of 2024, leaves the deposit facility rate at a record high. It is the third consecutive meeting at which the ECB has held rates steady, following the September 2023 increase that brought the deposit rate to its current level.

POLICY STATEMENT

In its policy statement, the Governing Council said incoming information had broadly confirmed its previous assessment of the medium-term inflation outlook. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and past rate increases keep being transmitted forcefully into financing conditions. Tight financing conditions are dampening demand, the statement said, and this is helping to push down inflation.

LAGARDE RESISTS CUT TIMING

Speaking at the press conference in Frankfurt, President Christine Lagarde declined to endorse market pricing that, at the time of the decision, implied substantial rate cuts during 2024, with some investors betting on a first move as early as April. Asked repeatedly about the timing of the first rate reduction, Lagarde said it was premature to discuss cuts and that the Governing Council would continue to follow a data-dependent, meeting-by-meeting approach. Future decisions, she said, would be based on the inflation outlook in light of incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.

Lagarde acknowledged that the disinflation process was under way but said the Council needed more evidence that wage growth was slowing and that corporate profit margins were absorbing rather than passing on remaining cost pressures. She said the Council was looking at all incoming data, not just wages. Euro area headline inflation stood at 2.9% in December, down from 10.6% at its October 2022 peak, while core inflation, stripping out energy and food, was 3.4%.

PEPP REINVESTMENTS

The ECB also noted that banks were continuing to repay amounts borrowed under the targeted longer-term refinancing operations and reaffirmed that the Pandemic Emergency Purchase Programme portfolio would be reduced by €7.5 billion per month on average over the second half of 2024, with full termination of PEPP reinvestments at the end of the year.

NEXT MEETING ON 7 MARCH

The Governing Council's next monetary policy meeting is scheduled for 7 March, when staff will publish updated macroeconomic projections.