As , the governing council of the ECB decided to raise key interest rates by 75 basis points. In a meeting on Thursday 27 October, they approved the third consecutive rate hike since the July meeting.
As a reminder, the ECB only started to raise rates at its July policy meeting, , followed by the September meeting, .
“Inflation remains far too high and will remain above target for an extended period,” the governing council noted in a statement after the meeting. While inflation in the euro area reached 9.9% in September, the ECB expects inflation not to fall back to the 2% target in the short term. “It will remain above the target in 2023 and 2024,” ECB president Christine Lagarde said in a speech to the International Monetary Fund (IMF) on 14 October.
Action on TLTROs
It was also expected that the monetary institution would take action on TLTROs (targeted longer-term refinancing operations), loans offered by the ECB to banks over a longer term and at favourable costs. The interest rate paid by banks benefiting from TLTROs is set at the average ECB deposit rate, currently below the current deposit rate of 0.75%.
With key rates rising, the TLTRO instrument had caused a €4.7trn liquidity glut in the eurozone banking system, Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.
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The ECB has therefore decided to adjust the interest rates applicable to TLTROs from 23 November and to offer banks additional voluntary early repayment dates. These measures are intended to encourage banks to reduce their gains on TLTROs that are considered cheap and thus reduce the excess liquidity in the euro area banking system.
Also a consequence of inflation
Reacting to the ECB’s action on TLTROs, ratings agency Fitch commented: “Making the terms of TLTRO loans to banks more onerous indicates a preference to start reducing this part of the balance sheet more quickly, especially as the cost of paying interest on bank reserves rises.”
TLTROs are an instrument to encourage banks to lend to businesses and households, while keeping borrowing costs low. The aim is to support spending and investment by economic operators. “This instrument played a central role in countering downside risks to price stability during the most acute phase of the pandemic,” the ECB said, while concluding: “In view of the unexpected and exceptional acceleration in inflation, it is necessary to recalibrate it to ensure that it is consistent with the broader process of monetary policy normalisation.”
This story was first published in French on . It has been translated and edited for Delano.