Inflation continues to decline but is still expected to remain too high for too long. The Governing Council of the European Central Bank (ECB) is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Therefore, on July 27, it decided to raise the three key ECB interest rates by 25 basis points.
Accordingly, the interest rate on the main refinancing operations (MRO) 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 tomorrow, August 2.
This rate increase 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 also decided to set the remuneration of minimum reserves at 0%, effective as of the beginning of the reserve maintenance period starting on September 20. 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 to implement the appropriate stance.
As regards the pandemic emergency purchase programme (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.
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.
ECB monetary operations
On July 24, the ECB announced the seven-day MRO. The operation was conducted on July 25 and attracted bids from euro area eligible counterparties of €11,035.50 million, €1,011 million more than the previous week. The amount was allotted in full at a fixed rate equivalent to the prevailing MRO rate of 4%, in accordance with current ECB policy.
On July 26, the ECB conducted the three-month, longer-term refinancing operation to be settled as a fixed rate tender procedure with full allotment, with the rate fixed at the average MRO rate over the life of the operation. The operation attracted bids of €3,165 million from euro area eligible counterparties.
Also on July 26, the ECB conducted the seven-day US dollar funding operation through collateralised lending in conjunction with the US Federal Reserve. This operation attracted bids of $223.70 million, which was 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 273-day
bills for settlement value July 27, maturing on October 26, 2023, and April 25, 2024, respectively.
Bids of €285.93 million were submitted for the 91-day bills, with the Treasury accepting €7.01 million, while bids of €57.37 million were submitted for the 273-day bills, with the Treasury accepting €13.06 million. Since €54.91 million worth of bills matured during the week, the outstanding balance of Treasury bills decreased by €34.84 million, standing at €846.25 million.
The yield from the 91-day bill auction was 3.014%, decreasing by 24.20 basis points from bids with a similar tenor issued on July 20, representing a bid price of €99.2439 per €100 nominal. The yield from the 273-day bill auction was 3.168%, decreasing by 1.10 basis points from bids with a similar tenor issued on May 11, representing a bid price of €97.6540 per €100 nominal.
During the week, there was no trading on the Malta Stock Exchange.
Today, the Treasury will invite tenders for 91-day and 182-day bills maturing on November 2, 2023, and February 1, 2024, respectively.
This report was prepared by the Monetary Operations and Collateral Management Office of the Central Bank of Malta.