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ECB makes major new interest rate hike in bid to combat inflation

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FRANKFURT — The European Central Bank raised interest rates by 75 basis points and signaled further tightening ahead as it fights record inflation that is rapidly eroding consumer spending power across the region.

“The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.00 percent, 2.25 percent and 1.50 percent respectively,” the ECB said in a statement Thursday.

The central bank had been widely expected to deliver another jumbo rate hike as it marches ahead on its fastest tightening cycle on record. The ECB raised rates by a total of 2 percent over the last three meetings to take them to the highest level since 2009.

And more is to come. According to the release, the Governing Council “expects to raise interest rates further, to ensure the timely return of inflation to its 2 percent medium-term inflation target.”

The pledge comes after the ECB had come under increasing fire from ministers and leaders who fear aggressive tightening accentuates risks of a deep recession in the eurozone.

In its statement, the ECB cautioned that inflation remains far too high and will stay above the target for an extended period with the sources of inflation broadening. “The Governing Council’s monetary policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations,” it said. 

The ECB also announced measures that will reduce subsidies to banks that were increasingly weighing on central bank profitability and, by extension, robbing eurozone governments off much-needed cash.

The Governing Council decided to adjust interest rates on ultra-long loans to banks, so-called LTRO III. “From 23 November 2022 until the maturity date or early repayment date of each respective outstanding TLTRO III operation, the interest rate on TLTRO III operations will be indexed to the average applicable key ECB interest rates over this period,” it said.

The current set-up of those loans, that the ECB extended to banks during the pandemic to encourage lending to the real economy, allows banks to make a profit from loans without passing on funds to firms and households but simply parking them at the ECB overnight. 

The ECB will also offer banks additional voluntary early repayment dates.

In addition, the ECB will also reduce the remuneration of minimum reserves held by credit institutions, that is the liquidity banks are required to hold, to align them more closely with money market conditions. In future, it will apply the deposit rate rather than the refinancing rate to those funds. 

The statement did not offer any hint on when the ECB might start to reduce its massive bond holdings by phasing out reinvestments.

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