© European Central Bank

At its meeting in Riga, Latvia, on 14 June, the Governing Council of the European Central Bank (ECB) took a decision to discontinue its purchases of bonds under the asset purchase programme (APP) at the end of 2018. Asset purchases by Eurosystem central banks are currently running at €30 billion per month. At a press conference, Mario Draghi, President of the ECB, explained: "We anticipate that, after September 2018, subject to incoming data confirming our medium-term inflation outlook, we will reduce the monthly pace of the net asset purchases to €15 billion until the end of December 2018 and then end net purchases."

The APP will cause the stock of assets held by Eurosystem central banks to rise to a figure of probably some €2.6 trillion by the end of the year. Draghi said that the ECB intended to maintain its policy of reinvesting the principal payments from maturing securities "for an extended period of time after the end of our net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation".

Key interest rates unchanged for now

At its meeting, the Governing Council left the key ECB interest rates unchanged. Thus, the interest rate on the main refinancing operations has been kept steady at 0.0%, the interest rate on the marginal lending facility at 0.25%, and that on the deposit facility at -0.40%. According to Draghi, the Governing Council expects the key ECB interest rates "to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path".

Inflation projection revised upward

Euro area consumer prices rose considerably as of late. According to Eurostat’s flash estimate, euro area consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) were up in May by 1.9% on the year, following 1.2% in April. According to Draghi, recent price developments reflected stronger rises in energy and food prices.

The latest Eurosystem staff macroeconomic projections from June have also been taken into account in the ECB Governing Council’s decisions. These projections forecast annual average HICP inflation at 1.7% in 2018, 2019 and 2020, significantly higher than as late as March of this year. The Eurosystem staff foresee annual real gross domestic product (GDP) growth in the euro area of 2.1% for this year, down slightly from their March projection. The experts expect real GDP growth of 1.9% in 2019 and 1.7% in 2020.