# ECB raises interest rates again, cuts bank subsidies
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-10-27
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: ECB raises interest rates to fight historic surge in
Meta Description: European Central Bank raises rates to combat historic inflation surge, plans to shrink balance sheet in aggressive move.
URL: https://financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidieshtml

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By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank raised interest rates again on Thursday and announced it was changing the terms of its ultra-cheap loans to commercial banks in a bid to shrink its bloated balance sheet and fight off a historic surge in inflation.

Worried that rapid price growth is becoming entrenched, the ECB is raising borrowing costs at the fastest pace on record, with further hikes almost certain as unwinding a decade’s worth of stimulus will take it well into next year and beyond.

The central bank for the 19 countries that use the euro [raised its deposit rate by a further 75 basis points](https://www.financedigest.com/how-to-raise-my-credit-score-40-points-fast.html "How to raise my credit score 40 points fast") to 1.5% – the highest rate since 2009. Until as recently as July, [ECB rates](https://www.financedigest.com/instant-view-ecb-sticks-with-big-rate-hike-even-as-bank-fears-roil-markets.html "Instant View: ECB sticks with big rate hike even as bank fears roil markets") had been in negative territory for eight years.

The Governing Council took today’s decision, and expects to raise [interest rates](https://www.financedigest.com/interest-rates-are-cut-to-an-all-time-low-what-will-this-mean-for-small-businesses.html "Interest rates are cut to an all-time low. What will this mean for small businesses?") further, to ensure the timely return of inflation to its 2% medium-term inflation target,” the ECB said in a statement.

The [euro dropped and European government bond](https://www.financedigest.com/delivery-hero-ramps-up-interest-payments-to-raise-1-billion-euro-convertible-bond.html "Delivery Hero ramps up interest payments to raise 1 billion euro convertible bond") yields slid after the announcement, which was in line with market expectations.

At a news conference, ECB President Christine Lagarde noted that while the Ukraine war and other global uncertainties meant the euro area economy faced a number of risks to the downside, [inflation risks were skewed upwards](https://www.financedigest.com/french-inflation-revised-upwards-in-february-to-7-3-final-figures.html "French inflation revised upwards in February to 7.3% – final figures").

Incoming wage data and recent wage agreements indicate that the growth of wages may be picking up,” she said of the possible emergence of future wage-price spirals, stressing the [bank was monitoring expectations about long-term inflation](https://www.financedigest.com/bank-of-england-still-needs-to-see-the-job-through-on-inflation-pill.html "Bank of England still needs to ‘see the job through’ on inflation: Pill").

Markets expect the pace of the hikes to slow somewhat, with the [deposit rate](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll") hitting 2% in December, then peaking at around 3% some time in 2023, although the unusually volatile outlook makes this timeline prone to changes.

Asked about concerns expressed by some euro zone governments that the ECB’s [rate hikes could throw the region into recession](https://www.financedigest.com/hotel-investors-should-they-be-worried-about-a-potential-economic-pause-delving-into-inflation-interest-rates-recession-etc.html "‘Hotel Investors – should they be worried about a potential economic pause?’ delving into inflation, interest rates, recession etc"), Lagarde said the ECB had a mandate to fight inflation and urged governments to carefully target any support for citizens through the energy crisis so as not to make inflation worse.

“Everyone has to do their job. Our job is price stability,” she said. “We have to do what we have to do. A [central bank](https://www.financedigest.com/central-banks-keep-hiking-rates-amid-banking-turmoil.html "Central banks keep hiking rates amid banking turmoil") has to focus on its mandate.

The ECB offered no hints for now about plans to start winding down its bond holdings, after hoovering up trillions of euros of [debt issued](https://www.financedigest.com/necessary-lessons-in-debt-six-out-of-ten-brits-wouldnt-feel-comfortable-discussing-any-money-issues-with-their-children.html "Necessary lessons in debt? Six out of ten Brits wouldn’t feel comfortable discussing any money issues with their children") by euro zone governments since 2015.

GRAPHIC – ECB [hikes policy rate](https://www.financedigest.com/dollar-falls-after-fed-raises-rates-forecasts-future-hike.html "Dollar falls after Fed raises rates, forecasts future hike") by another 75bps

https://graphics.reuters.com/GLOBAL-CENTRALBANKS/xmvjkgndjpr/chart.png

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/10/385.jpg)

[BALANCE SHEET](https://www.financedigest.com/decoding-balance-sheets-analyzing-assets-liabilities-and-equity.html "Decoding Balance Sheets: Analyzing Assets, Liabilities, and Equity")

With [euro zone inflation](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") hitting 9.9%, the ECB also took the first step toward shrinking its 8.8 trillion euro balance sheet, a move that is likely to raise borrowing costs further and may act as a sort of disguised rate hike.

In a [move which may be fought commercial banks](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks"), it curbed the subsidy it provides to such lenders through 2.1 trillion euros worth of ultra-cheap three-year loans called Targeted Longer-Term Refinancing Operations, or TLTROs.

In view of the unexpected and extraordinary [rise in inflation](https://www.financedigest.com/uk-inflation-rate-unexpectedly-rises-to-10-4-in-february.html "UK inflation rate unexpectedly rises to 10.4% in February"), it (TLTRO) needs to be recalibrated to ensure that it is consistent with the broader monetary policy normalisation process and to reinforce the transmission of policy rate increases to bank lending conditions,” the ECB said.

It said the interest rate on TLTRO operations will in future be indexed to the average applicable key [ECB](https://www.financedigest.com/fed-rates-up-boe-up-ecb-up-stocks-up.html "Fed rates up, BoE up, ECB up, stocks up") interest rates, which will encourage early repayment of the loans.

Making the terms of TLTRO loans to [banks more expensive signals](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") a preference to start shrinking this part of the balance sheet more quickly, especially as the cost of paying interest on bank reserves increases,” said Charles Seville, Senior Director, Fitch Ratings.

The [ECB said further pricing](https://www.financedigest.com/explainer-oil-price-surge-changes-ecb-narrative-only-at-the-margins.html "Explainer-Oil price surge changes ECB narrative only at the margins") details would be made available at 1345 GMT. In another change, the [ECB also said that minimum reserves would be remunerated at the deposit rate](https://www.financedigest.com/dutch-governor-knot-signals-ecb-will-keep-raising-rates-in-months-ahead-ft.html "Dutch governor Knot signals ECB will keep raising rates in months ahead- FT"), rather than the main rate, which is 50 basis point higher.

GRAPHIC – The race to [raise rates](https://www.financedigest.com/bank-of-england-raises-rates-to-3-5-says-inflation-has-peaked.html "Bank of England raises rates to 3.5%, says inflation has peaked")

https://graphics.reuters.com/GLOBAL-MARKETS/byvrloqyove/chart.png

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/10/386.jpg)

Having borrowed at zero or even negative rates at a time when the ECB’s main [worry was persistently low inflation](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries"), banks can now simply park TLTRO cash with the ECB and enjoy a risk-free return that rises with each deposit rate hike.

This is politically contentious in itself, but an abundance of liquidity is also keeping [money market rates depressed and preventing the ECB’s rate hikes from being fully passed through via the banks](https://www.financedigest.com/marketmind-banks-are-leaking-money.html "Marketmind: Banks are leaking money") to businesses and households.

The biggest chunk of TLTRO loans, worth around 1.5 [trillion euros](https://www.financedigest.com/european-governments-spend-half-a-trillion-euros-on-energy-crisis-report.html "European governments spend half a trillion euros on energy crisis – report"), expire next June. Thursday’s [changes may encourage banks](https://www.financedigest.com/exclusive-world-bank-seeks-more-funds-to-address-climate-change-other-crises-document.html "Exclusive-World Bank seeks more funds to address climate change, other crises -document") to repay them as soon as December, shrinking the ECB’s balance sheet in the process.

The bank confirmed its guidance on reinvestments of bonds maturing in its bond buying schemes, confounding some expectations for a small [change that would hint at a wind down of the Asset Purchase Programme](https://www.financedigest.com/ubs-makes-changes-to-buyback-programme-following-credit-suisse-takeover.html "UBS makes changes to buyback programme following Credit Suisse takeover") next year.

(Editing by Hugh Lawson and Catherine Evans)


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