ECB announced on Thursday that it would raise interest rates by 75 basis points, which is the third consecutive ECB hike of this year, while reducing support for European banks.
After a lot of speculation from market participants, the ECB said it is now changing the terms and conditions of its target long-term refinancing operation (tltro). It is a tool that provides attractive borrowing terms for European banks, designed to encourage lending to the real economy.
However, European banks are benefiting from tltro and rate hikes as the ECB has been faster than expected in amid surge in inflation. This situation is described as effectively providing subsidies to banks.
"In the severe stage of the pandemic, this tool played a key role in coping with the downside risks of stable prices. Today, given the unexpected and abnormal rise in inflation, it needs to be recalibrated," the ECB said in a statement.
So, it added that interest rates for TLTRO III tools will be adjusted from November 23 to match the main benchmark deposit convenience rate of the ECB. In addition, the bank will also be provided with voluntary early repayment date.
"In order to make the minimum reserve remuneration held by credit institutions in the Euro system more closely aligned with the money market conditions, the Management Committee decided to set the minimum reserve remuneration as the deposit convenience rate of the ECB."
This will lead to a significant increase in the bank's loan costs under the plan.
European Central Bank President Lagarde (Christine Lagarde) told reporters that the November 23 date will allow banks to adapt to the new conditions.
It is too early to cut balance sheet
Market participants also question whether the ECB will provide details on when it will start to shrink the balance sheet by 8.8 trillion euros ($8.8 trillion), the so-called quantitative tightening.
Lagarde said the conditions for the adoption of this measure will be discussed in December, but added that her team will focus on three main factors: the inflation outlook, measures taken so far, and conduction lag – taking into account the impact of the monetary policy decision on the economy will take some time.
Euro
Euro versus the US dollar weakened after the European Central Bank announced the above news. The euro fell below par for a time and then rebounded slightly. After the European Central Bank made its decision, European government bond yields also fell.
will also raise interest rates in the future
Thursday's interest rate hike raised the European Central Bank's main benchmark rate from 0.75% to 1.5%, a level that has never been seen since the outbreak of the sovereign debt crisis in 2009. Previously, the European Central Bank raised interest rates by 50 basis points and 75 basis points respectively in July and September.
However, the European Central Bank confirmed that its interest rate hike cycle has not yet ended.
"With the third consecutive sharp hike in policy interest rates, the Fed has made substantial progress in exiting the loose monetary policy . The Management Committee made a decision today and is expected to further raise interest rates to ensure inflation returns to the 2% medium-term inflation target in a timely manner," said the Central Bank of .
Several economists expect another 50 basis points rate hike in December. However, the ECB did not indicate the level of future interest rate hikes, saying that interest rate hikes will depend on the data.
Lagarde said at a press conference that the ECB has made "substantial progress" in reducing its stance on easing policy, a policy that has been implemented since the debt crisis and has continued during the epidemic.
However, she added that this so-called "normalization" process is not over yet. “We are not over yet, and there is more to do,” she said.
Meanwhile, the ECB is dealing with a record high inflation and a slowing economy. Many economists expect euro zone to fall into recession by the end of this year.For , China's central bank , it's a delicate balance, because if it launches a massive rate hike in order to deal with inflation, it could cause more trouble for the wider economy.
The ECB also said on Thursday: "Inflation rate remains too high and will be above the target level for a longer period of time."
In September, the inflation rate of 19 member states in the euro zone reached 9.9%.
Lagarde also acknowledged that the possibility of a recession increased.
When asked about the impact of the European Central Bank's decision on economic growth, Lagarde said: "We must do what we should do."
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