ECB hikes rates by 75 basis points and scales back support for European banks

The European Central Bank has announced its third consecutive increase in interesr rates this year.

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The European Central Bank announced Thursday 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 by some 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.

It said the interest rates applicable to the tool, known as TLTRO III, would be adjusted from Nov. 23 and banks would 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.

Further details on the new conditions for European banks will be published at 2:45 p.m. London time.

The ECB did not shed any light on when it plans to start reducing its balance sheet, however, in a process known as quantitative tightening — something market participants had been watching out for.

The euro weakened against the U.S. dollar in the wake of the announcements from the ECB. The common currency briefly fell below parity before recovering slightly. European government bond yields also fell following the ECB’s decision.

More rates hikes ahead

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