ECB raises interest rates by 75 basis points and plans to raise them further
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(Updated – October 27, 2022 8:16 a.m. EDT)
The Governing Council decided today to raise the three key ECB interest rates by 75 basis points. With this third consecutive major rate hike, the Governing Council has made substantial progress in withdrawing accommodative monetary policy. The Governing Council took today’s decision and plans to raise interest rates further to ensure that inflation quickly returns to its medium-term inflation target of 2%. The Governing Council will base the future path of policy rates on developments in the outlook for inflation and the economy, in line with its meeting-by-meeting approach.
Inflation remains far too high and will remain above target for an extended period. In September, inflation in the euro zone reached 9.9%. In recent months, soaring energy and food prices, supply bottlenecks and post-pandemic demand recovery have led to widening price pressures and a increase in inflation. The Governing Council’s monetary policy aims to reduce demand support and guard against the risk of a persistent rise in inflation expectations.
The Governing Council also decided to modify the terms and conditions of the third series of targeted longer-term refinancing operations (TLTRO III). During the acute phase of the pandemic, this instrument played a key role in addressing downside risks to price stability. Now, given the unexpected and extraordinary rise in inflation, it needs to be recalibrated to ensure it is consistent with the broader process of monetary policy normalization and to strengthen the transmission of rate hikes principals to the lending conditions of the banks. The Governing Council has therefore decided to adjust the interest rates applicable to TLTRO III from 23 November 2022 and to offer banks additional dates for voluntary prepayment.
Finally, in order to better align the remuneration of the minimum reserves held by credit institutions with the Eurosystem with money market conditions, the Governing Council decided to set the remuneration of the minimum reserves at the deposit facility rate of the ECB.
Details of the changes to the terms and conditions of TLTRO III are described in a separate press release which will be published at 3:45 p.m. CET. Another technical press release, detailing the evolution of the remuneration of the required reserves, will also be published at 3:45 p.m. CET.
Key ECB interest rates
The Governing Council decided to raise the three key ECB interest rates by 75 basis points. Consequently, the interest rate for the main refinancing operations and the interest rates for the marginal lending facility and the deposit facility will be increased to 2.00%, 2.25% and 1.50% respectively, with effect from 2 November 2022.
Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP)
The Governing Council intends to continue to fully reinvest principal payments from maturing securities purchased under the APP for an extended period after the date on which it began to raise policy interest rates of the ECB and, in any event, for as long as necessary to maintain abundant liquidity conditions and an appropriate monetary policy.
With regard to the PEPP, the Governing Council intends to reinvest the principal payments of maturing securities purchased under the program until at least the end of 2024. In any event, the future roll-off of the PEPP portfolio will be managed in such a way as to avoid any interference with the appropriate monetary policy.
The Governing Council will continue to show flexibility in the reinvestment of maturing repayments in the PEPP portfolio, in order to counter the risks to the monetary policy transmission mechanism related to the pandemic.
The Governing Council has decided to adjust the interest rates applicable to TLTRO III. From 23 November 2022 until the maturity date or early redemption date of each outstanding TLTRO III operation, the interest rate for TLTRO III operations will be indexed to the applicable average key ECB interest rates on this period. The Board of Governors also decided to offer banks additional voluntary prepayment dates. In any case, the Governing Council will regularly assess how targeted lending operations contribute to the stance of its monetary policy.
The Governing Council stands ready to adjust all its instruments within its mandate to ensure that inflation stabilizes at its medium-term target of 2%. The transmission protection instrument is available to counter unwarranted and disorderly market dynamics that pose a serious threat to the transmission of monetary policy in all euro area countries, thereby enabling the Governing Council to perform its duties more effectively. its price stability mandate.
The ECB President will comment on the considerations behind these decisions at a press conference from 2:45 p.m. CET today.