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 two per cent medium-term target in a timely manner.

In order to reinforce progress towards its target, on September 14, the Governing Council 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 4.50 per cent, 4.75 per cent and 4.00 per cent respectively, with effect from tomorrow, September 20.

This rate increase reflects the Governing Council’s 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.

Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.

The council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. It will continue to follow a data-dependent approach to determine the appropriate level and duration of restriction.

In particular, the Governing Council’s 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.

As concerns 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 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 two per cent 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 September 11, the ECB announced the seven-day MRO. The operation was conducted on September 12, 2023 and attracted bids from euro area eligible counterparties of €3,966 million, €20 million more than the previous week.

The amount was allotted in full at a fixed rate equivalent to the prevailing MRO rate of 4.25%, in accordance with current ECB policy.

On September 13, 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 $234.50 million, which were allotted in full at a fixed rate of 5.59 per cent.

During the week under review, participants in the third series of targeted longer-term refinancing operations six to 10 had the option of terminating or reducing their outstanding amount before maturity. Accordingly, on September 27, 2023, a total of €34,230.57 million will be repaid.

Domestic Treasury bill market

In the domestic primary market for Treasury bills, the Treasury invited tenders for 91-day bills for settlement value September 14, 2023, maturing on December 14. Bids of €157.68 million were submitted, with the Treasury accepting €17.68 million.

Since €44.38 million worth of bills matured during the week, the outstanding balance of Treasury bills decreased by €26.70 million, standing at €589.61 million.

The yield from the 91-day bill auction was 3.30 per cent, increasing by 90.10 basis points from bids with a similar tenor issued on September 7, 2023, representing a bid price of €99.1712 per €100 nominal.

During the week, there was no trading on the Malta Stock Exchange.

Yesterday, the Treasury invited tenders for 92-day and 274-day bills maturing on December 21, 2023, and June 20, 2024, respectively.

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

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