What changed in the European Central Bank statement — 4 May 2023

European Central Bank raised policy at 3.25%. Overall, the ECB statement tilts hawkish: forward guidance tightens with the cessation of APP reinvestments and a stronger commitment to restrictiveness, while the risk-balance backstop is removed. This signals the Governing Council is comfortable maintaining or even extending tightening pressure, with the next decision likely leaning toward another rate hike or a prolonged hold.

Decision

Decision: hike
Deposit facility rate: 3.25%

Going into the decision

On the day, the committee read as hawkish — 0.7 on a scale where +3 means every member wants higher rates and −3 means every member wants cuts.

Reconstructed from official member remarks published before the decision date. 5 of 27 active members had stored official remarks.

What changed

Overall, the ECB statement tilts hawkish: forward guidance tightens with the cessation of APP reinvestments and a stronger commitment to restrictiveness, while the risk-balance backstop is removed. This signals the Governing Council is comfortable maintaining or even extending tightening pressure, with the next decision likely leaning toward another rate hike or a prolonged hold.

Inflation — Little changed. Inflation language remains hawkish in both documents, with strong emphasis on persistent underlying price pressures; no material directional shift.
Labour Market — Little changed. Labour market not discussed in either document; no signal.

Previous wording

Inflation is projected to remain too high for too long.
inflation: Justifies continued tightening; inflation still above target.

Therefore, the Governing Council today decided to increase the three key ECB interest rates by 50 basis points
rate path: Rate hike confirmed; markets focus on size and signal of determination.

The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions, which will be determined by its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.
rate path: Forward guidance is conditional on data; no pre-commitment to future moves.

The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area.
rate path: Shows vigilance on financial stability but maintains primary focus on inflation.

In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.
rate path: Reassures markets of liquidity backstop, easing financial conditions.

ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.
inflation: Headline inflation projections slightly lower but above target in 2024; 2025 close to target.

At the same time, underlying price pressures remain strong. Inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, which is higher than foreseen in the December projections.
inflation: Core inflation revised up; persistent underlying pressures support further tightening.

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission.
rate path: Reaffirms commitment to inflation target; optionality on instruments.

Current wording

The inflation outlook continues to be too high for too long.
inflation: Strong language on inflation persistence justifies further tightening.

the Governing Council today decided to raise the three key ECB interest rates by 25 basis points.
rate path: Confirms the rate hike itself.

The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.
rate path: Commitment to keep rates high for an extended period.

At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.
rate path: Acknowledges transmission but flags uncertainty about its full impact.

The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
rate path: Leaves room for flexibility in future decisions.

Headline inflation has declined over recent months, but underlying price pressures remain strong.
inflation: Underlying inflation sticky, supporting further rate increases.

Official statement

Monetary policy decisions

4 May 2023

The inflation outlook continues to be too high for too long. In light of the ongoing high inflation pressures, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points. Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous meeting. Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.

The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s policy rate decisions will continue to be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

The key ECB interest rates remain the Governing Council’s primary tool for setting the monetary policy stance. In parallel, the Governing Council will keep reducing the Eurosystem’s asset purchase programme (APP) portfolio at a measured and predictable pace. In line with these principles, the Governing Council expects to discontinue the reinvestments under the APP as of July 2023.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively, with effect from 10 May 2023.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem does not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of June 2023. The Governing Council expects to discontinue the reinvestments under the APP as of July 2023.

As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations are contributing to its monetary policy stance.

***

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. The ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed. Moreover, the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.

Background reading

Cadence's comparison is generated from the official documents. Read the methodology.