What changed in the European Central Bank statement — 27 July 2023

European Central Bank raised policy at 3.75%. The ECB raised rates by 25bp for the second consecutive meeting, but the omission of balance sheet tightening and labour market concerns, alongside a softer inflation narrative, suggests a slightly less hawkish overall tone. The data-dependent guidance leaves the door open for a pause at the next meeting if incoming data confirms disinflation.

Decision

Decision: hike
Deposit facility rate: 3.75%

Going into the decision

On the day, the committee read as hawkish — 1.3 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

The ECB raised rates by 25bp for the second consecutive meeting, but the omission of balance sheet tightening and labour market concerns, alongside a softer inflation narrative, suggests a slightly less hawkish overall tone. The data-dependent guidance leaves the door open for a pause at the next meeting if incoming data confirms disinflation.

Inflation — Little changed. Both statements describe inflation as declining but still too high; the current removes explicit mention of underlying price pressures still strong, but the core message remains broadly unchanged.
Labour Market — More dovish. Prior highlighted the robust labour market as a factor slowing disinflation; current omits any labour market discussion, indicating reduced concern.
Rate Path — Little changed. Both meetings delivered a 25bp hike and maintained sufficiently restrictive forward guidance, but the current statement drops the explicit QT commitment, slightly reducing hawkishness.
Balance Sheet — More dovish. Prior announced discontinuation of APP reinvestments (QT), while current makes no balance sheet mention, signalling a less aggressive tightening stance.

Previous wording

Inflation has been coming down but is projected to remain too high for too long.
inflation: Reiterates that inflation is still above target and persistent.

Indicators of underlying price pressures remain strong, although some show tentative signs of softening.
inflation: Mixed signal: core inflation still strong but with nascent easing.

Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation.
labour market: Tight labour market is slowing the decline in core inflation.

Tighter financing conditions are a key reason why inflation is projected to decline further towards target, as they are expected to increasingly dampen demand.
rate path: Transmission is working, supporting the disinflation outlook.

The Governing Council’s future decisions will ensure that the key ECB interest 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: Commits to sufficiently restrictive rates and a prolonged hold.

The Governing Council confirms that it will discontinue the reinvestments under the asset purchase programme as of July 2023.
rate path: QT accelerates, tightening liquidity further.

Current wording

Inflation continues to decline but is still expected to remain too high for too long.
inflation: Acknowledges progress but stresses persistence, justifying further tightening.

The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target.
rate path: Confirms past hikes are working, reducing need for further aggressive action while still hawkish on transmission.

The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target.
rate path: Rates will stay high until inflation is sustainably at target; no cuts implied soon.

Official statement

Monetary policy decisions

27 July 2023

Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore today decided to raise the three key ECB interest rates by 25 basis points.

The rate increase today reflects the Governing Council’s assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. The developments since the last meeting support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period. While some measures show signs of easing, underlying inflation remains high overall. The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target.

The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, its interest 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 Governing Council also decided to set the remuneration of minimum reserves at 0%. This decision will preserve the effectiveness of monetary policy by maintaining the current degree of control over the monetary policy stance and ensuring the full pass-through of the interest rate decisions to money markets. At the same time, it will improve the efficiency of monetary policy by reducing the overall amount of interest that needs to be paid on reserves in order to implement the appropriate stance.

The details of the change to the remuneration of minimum reserves are provided in a separate press release to be published at 15:45 CET.

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 4.25%, 4.50% and 3.75% respectively, with effect from 2 August 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 no longer reinvests the principal payments from maturing securities.

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 and their ongoing repayment are contributing to its monetary policy stance.

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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. 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.