ECB Raises Interest Rates Again by 75 Basis Points

On Thursday, the European Central Bank (ECB) announced a 75-basis-point interest rate hike — its third consecutive increase this year — while also scaling back support for European banks.

Following much speculation by market participants, the ECB said it was now changing the terms and conditions of its targeted longer-term refinancing operations, or TLTROs. These are a tool that provides European banks with attractive borrowing conditions, designed to incentivize lending to the real economy.

However, because the ECB has been increasing rates faster than expected in the face of soaring inflation, European lenders are benefiting from both TLTROs and higher interest rates. The situation has been described as effectively providing a subsidy to banks.

“During the acute phase of the pandemic, this instrument played a key role in countering downside risks to price stability. Today, in view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated,” the ECB said in a statement.

Therefore, it added that the interest rates applicable to the tool, known as TLTRO III, would be adjusted from Nov. 23 to match the deposit facility rate, which is the main benchmark of the ECB. In addition, banks will also be offered voluntary early repayment dates.

“In order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate.”

This will see the cost of lending for banks rise significantly under the scheme.

ECB President Christine Lagarde told reporters that the Nov.23 date would allow banks to adjust to the new conditions.

Thursday’s rate hike takes the ECB’s main benchmark from 0.75% to 1.5%, a level not seen since 2009 before the sovereign debt crisis. It comes after the central bank rose rates by 50 basis points in July and 75 basis points in September.

However, the ECB confirmed that its rating hike cycle is not yet over.

“With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target,” the central bank said.