European Central Bank as scheduled hike rate 75 basis points, and announced TLTRO rules adjustments. Lagarde said that discussions on asset purchase plans will continue and the QT rules will be decided on December 15.
On Thursday, October 27, the European Central Bank announced its latest policy resolution, raising all three major interest rates by 75 basis points, in line with market expectations, and is the second consecutive sharp rate hike of 75 basis points. After the interest rate hike, the European Central Bank's marginal loan interest rate was 2.25%, the main refinancing rate was 2%, and the deposit convenience rate was 1.5%.
After hikes tonight, the European Central Bank deposit mechanism interest rate has risen to its highest level since 2009.
After the ECB resolution was announced, euro fell in the short term, the euro fell below 1.00 against the US dollar, and fell more than 0.80% during the day.
will not rule out further interest rate hikes in the future
ECB stated in a statement that with the third consecutive interest rate increase, the Management Committee has made substantial progress in canceling the easing of monetary policy.
The ECB stressed that with the surge in energy and food prices, supply bottlenecks and the recovery of demand after the epidemic, Europe's inflation has intensified in recent months, and the eurozone inflation rate in September has reached 9.9%.
Currently, the inflation rate in Europe is still too high and will remain above the target for a long time. The ECB said that with the third consecutive interest rate increase, the Management Committee has made substantial progress in abolishing monetary policy easing, and hopes to further raise interest rates to ensure that inflation returns to the medium-term inflation target of 2% in a timely manner.
European Central Bank Governor Lagarde said at a subsequent press conference that the ECB has not yet completed the normalization of monetary policy, and the scale of future interest rate hikes will depend on the data and will be decided at a successive meeting that the terminal interest rate (peak interest rate) may exceed the neutral interest rate level.
ECB announced that it will change the terms and conditions of targeted long-term refinancing operation (TLTRO) III and provide additional voluntary repayment dates to banks. The specific adjustments to will start from November 23, and the interest rate of the Targeted Long-term Refinancing Operation (TLTRO) III operation will be linked to the ECB's average applicable key interest rates during this period.
The ECB said that during the severe period of the epidemic, targeted long-term refinancing operations (TLTRO) have played a key role in coping with the downside risks of stable prices. But given the rapid rise in inflation, tools need to be recalibrated to ensure they are consistent with the broader process of monetary policy normalization and to strengthen the transmission of policy interest rate hikes to bank lending conditions.
The ECB also stated in a statement that the reinvestment of the asset purchase plan will continue as long as necessary. Management Committee will continue to flexibly reinvest the redemption of the upcoming Emergency Anti-epidemic Bond Purchase Program (PEPP) portfolio.
ECB stressed that it will continue to flexibly use the reinvestment of maturing bonds in monetary policy portfolios to cope with the risks of the monetary policy transmission mechanism related to the epidemic. Conduction Protection Tool (TPI) can be used to deal with unfounded and disorderly market volatility that poses a serious threat to the monetary policy transmission of all euro zone countries, thus enabling the ECB to more effectively implement its policies. will try to avoid intervention through appropriate monetary policy stance in the future.
The ECB also adjusted the remuneration of the bank's minimum reserves, and the Management Committee decided to set the remuneration of the minimum reserves as the interest rate of the deposit mechanism of the ECB.
The ECB did not mention the QT that the outside world is looking forward to in its official statement.
European Central Bank Governor Lagarde said at a subsequent press conference that did not specifically discuss QT measures at this meeting, and would continue to discuss the asset purchase plan and decide on key principles on December 15. This is basically consistent with the analysis of Citi . that is, the ECB needs to wait for interest rates to return to the "neutral" level before starting QT.
Rate hikes may slow down in the fourth quarter
Market analysis believes that the interest rate decision shows that the ECB continues to respond to outside criticism of its lag behind the situation, especially its lag with Fed , and is also responding to the increasing demands to set a bottom for the euro in order to strive to control the additional import inflation (especially energy prices) caused by the weak euro. Given that the eurozone is likely to fall into recession in the fourth quarter, the ECB is expected to slow down the rate hike from that point.
ECB's decision to increase the price of "targeted long-term refinancing operations" loans for banks, suggesting that the ECB tends to start shrinking this portion of its balance sheet faster. Especially when the cost of paying bank reserve interest rates increases. ’s policy adjustment on Thursday could encourage banks to repay loans in advance, thereby shrinking the ECB’s balance sheet.
The European Central Bank maintains guidance on reinvesting due bonds in bond purchase plans, which breaks market expectations, that is, the European Central Bank will make a slight adjustment, suggesting that the scale of asset purchase plans will be gradually reduced next year.
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