ECB decisions
On October 17, the Governing Council of the European Central Bank (ECB) decided to lower the three key ECB interest rates by 25 basis points. Accordingly, the interest rates on the deposit facility, the main refinancing operations (MRO) and the marginal lending facility will be decreased to 3.25%, 3.40% and 3.65% respectively, with effect from tomorrow, October 23.
In particular, the decision to lower the deposit facility rate, which is the rate through which the Governing Council steers the monetary policy stance, is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity.
Meanwhile, financing conditions remain restrictive. Inflation is expected to rise in the coming months, before declining to target in the course of next year. Domestic inflation remains high, as wages are still rising at an elevated pace. At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation.
The 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 notes that the asset purchase programme is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.
The Eurosystem no longer reinvests all of the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP), reducing 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.
Labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation
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 (TPI) 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 October 14, the ECB announced the seven-day main refinancing operation (MRO). The operation was conducted on October 15, and attracted bids from euro area eligible counterparties of €9,563.00 million, €2,723.00 million more than the previous week. The amount was allotted in full at a fixed rate equivalent to the prevailing MRO rate of 3.65%, in accordance with current ECB policy.
On October 16, 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 $162.50 million, which were allotted in full at a fixed rate of 5.08%.
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 October 17, maturing on January 16, and April 17, 2025, respectively. Bids of €42.25 million were submitted for the 91-day bills, with the Treasury accepting €12 million, while bids of €3.23 million were submitted for the 182-day bills, with the Treasury accepting the full amount.
Since €27.36 million worth of bills matured during the week, the outstanding balance of Treasury bills decreased by €12.13 million, standing at €350.01 million.
The yield from the 91-day bill auction was 2.788%, increasing by 2.60 basis points from bids with a similar tenor issued on October 10, representing a bid price of €99.3002 per €100 nominal. The yield from the 182-day bill auction was 2.555%, increasing by 4.20 basis points from bids with a similar tenor also issued on October 10, representing a bid price of €98.7248 per €100 nominal.
During the week, secondary market turnover in Malta Government Treasury bills amounted to €201,000, all executed on the On-Exchange market of the Malta Stock Exchange.
Today, October 22, the Treasury will invite tenders for 91-day and 182-day bills maturing on January 23 and April 24, 2025, respectively.
The report was prepared by the Monetary Operations and Collateral Management Office of the Central Bank of Malta.