European Central Bank raises interest rates by 75 basis points

27 Oct '22

2 min read

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The Governing Council of the European Central Bank (ECB) today decided to raise the three key ECB interest rates by 75 basis points. Accordingly, 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 per cent, 2.25 per cent and 1.50 per cent respectively, with effect from November 2, 2022.

With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. “The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its two per cent medium-term inflation target. The Governing Council will base the future policy rate path on the evolving outlook for inflation and the economy, following its meeting-by-meeting approach,” the ECB said in a press release about its monetary policy decisions.

“Inflation remains far too high and will stay above the target for an extended period. In September, euro area inflation reached 9.9 per cent. In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation. 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,” the ECB release added.

The Governing Council also decided to change 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 countering downside risks to price stability. “Today, in view of the unexpected and extraordinary rise in inflation, it 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 Governing Council therefore decided to adjust the interest rates applicable to TLTRO III from November 23, 2022 and to offer banks additional voluntary early repayment dates,” the ECB said.

Finally, in order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate.

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