The European Central Bank (ECB) has announced a 25 basis point increase in its three key interest rates, in response to high inflation pressures in the euro area.
According to a news release, interest rates on the main refinancing operations, marginal lending facility and deposit facility were raised to 3.75%, 4%, and 3.25%, respectively, effective Wednesday. The ECB says its future decisions will ensure that 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 determine the appropriate level and duration of restriction, based on the inflation outlook, incoming economic and financial data, underlying inflation dynamics and monetary policy transmission.
"Our decisions aim to ensure that inflation returns to our 2% target over the medium term and to preserve the smooth transmission of monetary policy," said ECB President Christine Lagarde at a news conference. "Our tool kit is fully equipped to provide liquidity support to the euro area financial system if needed."
The Governing Council will continue reducing the Eurosystem's asset purchase program (APP) portfolio at a measured and predictable pace and expects to discontinue the reinvestments under the APP as of July.
In terms of the COVID-19 pandemic emergency purchase program (PEPP), the principal payments from maturing securities will be reinvested until at least the end of 2024, and the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
The Governing Council intends to continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio to counter risks to the monetary policy transmission mechanism related to the pandemic.
"We believe that the measures will help ensure that inflation returns to our medium-term target of 2% over the medium term," Lagarde said. "We remain fully committed to using all of the instruments available within our mandate to achieve this objective, and we stand ready to adjust all of our instruments as needed to preserve the smooth functioning of monetary policy transmission and ensure the stability of the euro area economy."
