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European Central Bank Holds Rates and Trims Inflation Forecast

Title: European Central Bank Holds Interest Rates Steady and Accelerates Balance Sheet Reduction

The European Central Bank (ECB) has made significant announcements in its latest meeting, opting to keep interest rates unchanged for the second consecutive meeting. However, the bank has revised its growth forecasts downward and unveiled plans to expedite the reduction of its balance sheet.

With the intent to maintain policy rates at restrictive levels as long as necessary, the ECB also acknowledged the expectation of gradual decline in inflation next year. Notably, the latest forecasts indicate a slowdown in economic growth, with average real GDP anticipated to expand by 0.6% in 2023 and 0.8% in 2024.

Highlighting elevated domestic price pressures, particularly due to increasing labor costs, the ECB projected headline inflation rates, which are expected to average at 5.4% in 2023, 2.7% in 2024, and 2.1% in 2025.

To control inflation, tighter financing conditions have been implemented, which have dampened demand. However, the bank anticipates growth to recover in the future.

The central bank opted to maintain its key rate at a record high of 4%, reflecting its commitment to ensuring a stable and well-balanced economy. Moreover, the ECB announced that reinvestments under the pandemic emergency purchase program (PEPP) will be concluded by the end of 2024.

Taking a step further in tightening monetary policy, the ECB will gradually reduce the PEPP portfolio by an average of €7.5 billion ($8.19 billion) per month during the second half of 2024. This decision to accelerate the balance sheet reduction came earlier than expected and showcases the bank’s shift towards tightening its monetary policy.

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Additionally, with the normalizing of the Eurosystem’s balance sheet, all monetary policy tools are now in a tightening mode, indicating a clear policy direction towards controlling inflation and supporting sustainable economic growth.

The ECB’s decisions reflect its ongoing efforts to navigate the economic challenges brought about by the pandemic and to ensure long-term stability within the Eurozone. As the global economy continues to evolve, these measures aim to strike a delicate balance between price stability, economic growth, and financial stability.

Thelma Binder

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