ECB decisions

On June 6, the Governing Council of the European Central Bank decided to decrease by 25 basis points the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility to 4.25%, 4.50% and 3.75%, respectively, with effect from June 12.

Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady. Since the Governing Council meeting in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly.

Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons. Monetary policy has kept financing conditions restrictive. By dampening demand and keeping inflation expectations well anchored, this has made a major contribution to bringing inflation back down.

At the same time, despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year. The latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections. Staff now see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. For inflation excluding energy and food, staff project an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026. Economic growth is expected to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026.

The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will 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 council is not pre-committing to a particular rate path.

The council intends to discontinue reinvestments under the PEPP at the end of 2024

The council notes that the asset purchase programme portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities. On the pandemic emergency purchase programme, the council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP until the end of June 2024.

Over the second half of the year, it intends to reduce the PEPP portfolio by €7.5 billion per month on average. The council intends to discontinue reinvestments under the PEPP at the end of 2024. The 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.

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the council will regularly assess how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.

The 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 council to more effectively deliver on its price stability mandate.

ECB monetary operations

On June 3, the ECB announced the seven-day MRO. The operation was conducted on June 4 and attracted bids from euro area eligible counterparties of €2,327 million, €2,575 million less than the previous week. The amount was allotted in full at a fixed rate equivalent to the prevailing MRO rate of 4.50%, in accordance with current ECB policy.

On June 5, the ECB conducted a seven-day US dollar funding operation through collateralised lending in conjunction with the US Federal Reserve. This operation attracted bids of $114.10 million, which were allotted in full at a fixed rate of 5.58%.

Domestic Treasury bill market

In the domestic primary market for Treasury bills, the Treasury invited tenders for 91-day and 182-day bills for settlement value June 6, maturing on September 5 and December 5, respectively.

Bids of €81.62 million were submitted for the 91-day bills, with the Treasury accepting €25.37 million, while bids of €34.75 million were submitted for the 182-day bills, with the Treasury accepting €4.11 million. Since €55.02 million worth of bills matured during the week, the outstanding balance of Treasury bills decreased by €25.54 million, standing at €547.69 million.

The yield from the 91-day bill auction was 3.558%, increasing by 0.30 basis point from bids with a similar tenor issued on May 30, representing a bid price of €99.1086 per €100 nominal. The yield from the 182-day bill auction was 2.998%, decreasing by 8.30 basis points from bids with a similar tenor also issued on May 30, representing a bid price of €98.5070 per €100 nominal.

During this week, secondary market turnover in Malta Government Treasury bills amounted to €350,000, all executed on the On-exchange market of the Malta Stock Exchange.

Today, June 11, the Treasury will invite tenders for 91-day and 182-day bills maturing on September 12 and December 12, respectively.

The article is prepared by the Monetary Operations and Collateral Management Office of the Central Bank of Malta.