ECB decisions

On December 14, the Governing Council of the European Central Bank decided that the interest rate on the main refinancing operations (MRO) and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00%, respectively.

While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term. According to the latest Eurosystem staff projections for the euro area, inflation is expected to decline gradually over the course of next year, before approaching the Governing Council’s 2% target in 2025.

The council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. Its future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.

Meanwhile, the council will continue to follow a data-dependent approach to determine 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 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 (PEPP), the Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024.

Over the second half of the year, it intends to reduce the PEPP portfolio by €7.50 billion per month on average. The council intends to discontinue reinvestments under the PEPP at the end of 2024.

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.

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 December 11, the ECB announced the seven-day MRO. The operation was conducted on December 12 and attracted bids from euro area eligible counterparties of €6,478 million, €30 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 December 13, 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 $233.50 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 December 14, maturing on March 14 and June 13, 2024, respectively.

Bids of €117.47 million were submitted for the 91-day bills, with the Treasury accepting €55.17 million, while bids of €65.72 million were submitted for the 182-day bills, with the Treasury accepting €26.90 million. Since €42.03 million worth of bills matured during the week, the outstanding balance of Treasury bills increased by €40.04 million, standing at €634.38 million.

The yield from the 91-day bill auction was 3.646%, increasing by 1.00 basis point from bids with a similar tenor issued on December 7, representing a bid price of €99.0868 per €100 nominal.

The yield from the 182-day bill auction was 3.500%, increasing by 0.20 basis point from bids with a similar tenor also issued on December 7, representing a bid price of €98.2613 per €100 nominal.

During this week, secondary market turnover in Malta Government Treasury bills amounted to €16.40 million, all executed on the on-exchange market of the Malta Stock Exchange.

Yesterday, the Treasury invited tenders for 91-day and 182-day bills maturing on March 21 and June 20, 2024, respectively.

This report is prepared by the Monetary Operations and Collateral Management Office of the Central Bank of Malta.