European Central Bank (ECB): Key policy rates remain unchanged after 11 meetings
2023-10-25
■ At the Governing Council meeting on October 26, the European Central Bank (ECB) decided to keep the main policy interest rate at the level it has been since June 2022.
■ However, progress in discussions on quantitative tightening (QT) within the Governing Council is expected to be difficult as concerns about a potential loss of fiscal discipline in Italy intensify.
The consumer price index (revised, HICP) rose 4.3% in September from a year earlier, exceeding the central bank's target of 2.0%, but the sharp decline was mainly due to base effects. The core HICP that the ECB focuses on, excluding food, energy, alcohol and tobacco, also maintained an increase rate of 4.5%, maintaining the low level since August 2020. In its September statement, the ECB said: "The Governing Council considers that the main policy rate has reached a level that would allow an early return to the inflation target and has remained stable for a sufficient period of time." This was interpreted as suggesting that there would be no rate hikes. In the minutes of the meeting, many members advocated keeping the policy interest rate unchanged, taking into account the economic slowdown and the effects of past financial tightening. With long-term interest rates currently rising, and uncertainty over the situation in the Middle East, key policy rates are likely to remain unchanged again at the current Governing Council, the 11th since June 2022.
On the other hand, the Italian government approved the 2024 budget on the 16th. Despite the implementation of additional economic measures through tax cuts and increased spending, which reduced the size to 24 billion Euros from 35 billion Euros in the previous year, the fiscal deficit (as a share of GDP) rose to 4.3%, exceeding the European Union (EU) set target level of 3%. The ECB has stopped reinvesting maturing bonds under the Asset Purchase Program (APP), but for the Epidemic Emergency Purchase Program (PEPP), reinvestment will continue until at least the end of 2024, as well as in response to sharp changes in financial markets, especially government bonds as yield differentials widened, the ECB maintained flexibility in government bond purchases. While some ECB members advocate further steps to taper quantitative easing, discussions at the board are expected to be difficult to progress amid growing concerns over a possible loss of fiscal discipline in Italy. Although the specific direction of future policies may not be spelled out in detail, the statement and ECB President Christine Lagarde's press conference are still attracting attention.
■ However, progress in discussions on quantitative tightening (QT) within the Governing Council is expected to be difficult as concerns about a potential loss of fiscal discipline in Italy intensify.
The consumer price index (revised, HICP) rose 4.3% in September from a year earlier, exceeding the central bank's target of 2.0%, but the sharp decline was mainly due to base effects. The core HICP that the ECB focuses on, excluding food, energy, alcohol and tobacco, also maintained an increase rate of 4.5%, maintaining the low level since August 2020. In its September statement, the ECB said: "The Governing Council considers that the main policy rate has reached a level that would allow an early return to the inflation target and has remained stable for a sufficient period of time." This was interpreted as suggesting that there would be no rate hikes. In the minutes of the meeting, many members advocated keeping the policy interest rate unchanged, taking into account the economic slowdown and the effects of past financial tightening. With long-term interest rates currently rising, and uncertainty over the situation in the Middle East, key policy rates are likely to remain unchanged again at the current Governing Council, the 11th since June 2022.
On the other hand, the Italian government approved the 2024 budget on the 16th. Despite the implementation of additional economic measures through tax cuts and increased spending, which reduced the size to 24 billion Euros from 35 billion Euros in the previous year, the fiscal deficit (as a share of GDP) rose to 4.3%, exceeding the European Union (EU) set target level of 3%. The ECB has stopped reinvesting maturing bonds under the Asset Purchase Program (APP), but for the Epidemic Emergency Purchase Program (PEPP), reinvestment will continue until at least the end of 2024, as well as in response to sharp changes in financial markets, especially government bonds as yield differentials widened, the ECB maintained flexibility in government bond purchases. While some ECB members advocate further steps to taper quantitative easing, discussions at the board are expected to be difficult to progress amid growing concerns over a possible loss of fiscal discipline in Italy. Although the specific direction of future policies may not be spelled out in detail, the statement and ECB President Christine Lagarde's press conference are still attracting attention.