ECB raises interest rates again, cuts bank subsidies

The European Central Bank announced on Thursday that it would raise interest rates again, shrink its bloated balance sheet and revise the terms of its ultra-low loans to commercial banks in a bid to fend off a historic surge in inflation.

Worried about fast-paced inflation taking hold, the ECB is raising borrowing costs at the fastest pace in history, and with a decade’s worth of stimulus on track for next year and beyond, further hikes are unlikely. It is certain.

The central banks of 19 euro-using countries have raised deposit rates by another 75 basis points to 1.5%.

ecb european central bank

“The ECB expects today’s decision to raise interest rates further in order to return inflation to its 2% medium-term inflation target in a timely manner,” the ECB said in a statement.

After the announcement, the euro fell and European government bond yields fell, in line with market expectations.

At a press conference, ECB President Christine Lagarde said the eurozone economy faces downside risks due to the Ukraine war and other global uncertainties, but inflation risks are on the upside. did.

“Looking ahead wage data and recent wage agreements show that wage growth could pick up,” she said of the possible emergence of a future wage-price spiral, suggesting that the banks could see long-term inflation rise. He emphasized that he is monitoring expectations for

The market expects the pace of rate hikes to slow somewhat as deposit rates hit 2% in December and peak at around 3% sometime in 2023, but an unusually volatile outlook could put , this timeline is subject to change.

Asked about concerns expressed by some eurozone governments that the ECB’s rate hike could plunge the region into recession, Lagarde said the ECB has a mandate to fight inflation and said that through the energy crisis urged governments to carefully target their support for worsening inflation.

“Everyone has to do their job. Our job is price stability,” she said. “We have to do what we have to do. Central banks have to focus on their mandate.”

The ECB has so far given no hint of plans to start reducing its bond holdings after accumulating trillions of euros of debt issued by eurozone governments since 2015.

Balance sheet

With eurozone inflation reaching 9.9%, the ECB has taken the first steps to shrink its €8.8 trillion balance sheet.

In a move that may fight commercial banks, it has curtailed the subsidies it provides to such lenders through ultra-low three-year loans worth €2.1 trillion, called targeted long-term refinancing operations (TLTRO). did.

“In view of the unexpected and unusual rise in inflation, the ECB said: “To ensure consistency with the broader monetary policy normalization process, and to strengthen the way the policy rate hike is reflected in banks’ lending terms, the ECB said: (TLTRO) needs to be readjusted.” Said.

Interest rates for TLTRO operations will be linked to the average interest rates of major ECBs that will apply in the future, facilitating early repayment of loans.

“Higher terms on TLTRO loans to banks will increase the cost of paying interest on bank reserves, especially in this part of the balance sheet,” said Charles Seville, senior director at Fitch Ratings. indicates that you prefer to start shrinking more quickly.

The ECB said further pricing details will be available at 1345 GMT. In another change, the ECB also said that minimum reserves would be paid at the deposit rate, which is 50 basis points higher, rather than the main rate.

Banks that borrowed at zero or negative interest rates when the ECB’s main concern was persistently low inflation can now store TLTRO cash in the ECB and earn risk-free returns that rise whenever deposit rates rise. You can enjoy

While this is itself politically contentious, abundant liquidity continues to push money market rates down, preventing ECB rate hikes from fully reaching businesses and households through banks.

The largest part of the TLTRO loans, worth about €1.5 trillion, expires next June. Thursday’s changes will force banks to pay him back as early as December, potentially shrinking his ECB balance sheet in the process.

Banks have confirmed guidance on reinvesting matured bonds in bond purchase schemes, confusing some expectations for minor changes that could suggest a reduction in asset purchase programs next year. ECB raises interest rates again, cuts bank subsidies

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