ECB raises its key rate by 75 basis points and reduces its long-term refinancing operations

On Thursday, the European Central Bank (ECB) announced the third consecutive increase in the central bank’s benchmark bank interest rate this year, raising the rate by 75 basis points (bps). In addition to the rate hike, the ECB changed the terms of the central bank’s targeted long-term refinancing operations, noting that they should be “recalibrated“.

ECB raises rates to try to curb runaway inflation.

Eight days ago, the European Union’s statistical office Eurostat released the latest inflation report for September. Eurostat data showed that the eurozone’s annual inflation rate jumped to 9.9 percent in September, the highest rate in 40 years. A week later, the European Central Bank (ECB) and its president, Christine Lagarde, raised the benchmark bank rate for the third consecutive time.

The rate has been increased by 75 basis points and the terms of the targeted longer-term refinancing operations (TLTROs) will be changed and adjusted starting November 23. The ECB said that TLTROs played an important role during the Covid-19 pandemic and now the refinancing operations need an adjustment. “During the acute phase of the pandemic, this instrument played a critical role in addressing the downside risks to price stability“, the ECB stressed.

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The central bank added:

Now, in view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated – In order to align the remuneration of the minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of the minimum reserves at the rate of the ECB deposit facility.

Central banks around the world are trying to figure out how they can gauge the deposit facility rate and curb inflation at the same time. Most central banks are following the U.S. Federal Reserve, which is expected to raise the federal funds rate (FFR) by 75 basis points next month.

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Slowly but surely, as an indicator with a significant lag, the rise in borrowing rates or the cost of European Union loans is increasing across the country’s financial sector. With the ECB raising its rate by 75 basis points, rising borrowing costs will affect all European Union (EU) market participants going forward. For example, EU mortgage rates hit a seven-year high this month, after jumping one percentage point at the end of August.

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