The European Central Bank announced its third consecutive interest rate hike this year.
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The European Central Bank on Thursday announced a 75 basis point rate hike – the third in a row this year – while also unveiling new conditions for European banks.
Market participants have two questions in mind ahead of the meeting: When will the ECB begin to reduce its balance sheet, in a process known as quantitative tightening, and what will happen to lending conditions to banks in the near future?
The ECB announced on Thursday that it is changing the terms and conditions of its targeted long-term refinancing, or TLTRO – a tool that gives European banks favorable terms. attractive loan conditions, designed to encourage lending to the real economy.
“The Governing Board … has decided to adjust the interest rates applicable to TLTRO III from 23 November 2022 and to provide banks with additional voluntary early repayment dates,” the ECB said.
“In order to adjust the remuneration of the minimum reserves held by credit institutions with the euro system more closely to money market conditions, the Board of Governors decided to set the minimum reserve remuneration at the ECB’s deposit base rate.”
Because the ECB raised rates faster than expected amid soaring inflation, lenders in Europe are benefiting from both TLTRO and higher interest rates. The situation has been described by some as providing effective subsidies for the banks.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said: “The optical system is very bad amid a historic shock to household incomes and key pressures. cannot be ignored”.
In addition, the latest rate hike took the ECB’s main benchmark from 0.75% to 1.5%, levels not seen since 2009 before the government debt crisis. It comes after the central bank raised interest rates by 50 basis points in July and 75 basis points in September.
ECB is dealing with both record highs inflationary and a slowing economy, with many economists predicting a recession in the region before the end of the year. That is a fine balance for the central bank, as if the central bank raises interest rates aggressively in an attempt to deal with inflation, it could cause more trouble for the broader economy. bigger.
This is a breaking news story and will be updated shortly.
