On 15 December 2022 the Governing Council decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further. In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. The Governing Council's future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
The key ECB interest rates are the Governing Council's primary tool for setting the monetary policy stance. At its December meeting, the Governing Council also discussed principles for normalising the Eurosystem's monetary policy securities holdings. From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.
At its meeting in February 2023 the Governing Council will announce the detailed parameters for reducing the APP holdings. The Governing Council will regularly reassess the pace of the APP portfolio reduction to ensure it remains consistent with the overall monetary policy strategy and stance, to preserve market functioning, and to maintain firm control over short-term money market conditions. By the end of 2023, the Governing Council will also review its operational framework for steering short-term interest rates, which will provide information regarding the endpoint of the balance sheet normalisation process.
At its December 2022 meeting, the Governing Council decided to raise interest rates, and expects to raise them significantly further, because inflation remains far too high and is projected to stay above the target for too long. According to Eurostat's flash estimate, inflation was 10.0% in November, slightly lower than the 10.6% recorded in October. The decline resulted mainly from lower energy price inflation. Food price inflation and underlying price pressures across the economy have strengthened and will persist for some time. Amid exceptional uncertainty, Eurosystem staff have significantly revised up their inflation projections. They now see average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023, with inflation expected to decline markedly over the course of the year. Inflation is then projected to average 3.4% in 2024 and 2.3% in 2025. Inflation excluding energy and food is projected to be 3.9% on average in 2022 and to rise to 4.2% in 2023, before falling to 2.8% in 2024 and 2.4% in 2025.
The euro area economy may contract in the fourth quarter of 2022 and the first quarter of 2023, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions. According to the December 2022 Eurosystem staff macroeconomic projections for the euro area, a recession would be relatively short-lived and shallow. Growth is nonetheless expected to be subdued in 2023 and has been revised down significantly compared with the September 2022 ECB staff projections for the euro area. Beyond the near term, growth is projected to recover as the current headwinds fade. Overall, the December 2022 projections now see the economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025.
