ECB raises rates 75bps, adjusts remuneration of minimum reserves, and recalibrates targeted lending operations

The European Central Bank (ECB) made a slew of announcements.

It raised the three key ECB interest rates by 75 basis points. With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. It expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.

In addition, the remuneration of minimum reserves is set at the Eurosystem’s deposit facility rate (DFR). The change will become effective as of the beginning of the reserve maintenance period starting on 21 December 2022. Change better aligns minimum reserves remuneration with money market rates, the ECB said in a statement.

There was also an announcement that targeted lending operations are recalibrated to help restore price stability over the medium term. The key points are:

  • ECB recalibrates third series of targeted longer-term refinancing operations (TLTRO III) to ensure consistency with broader monetary policy normalization process
  • Recalibration will help address unexpected and extraordinary inflation increases by reinforcing transmission of policy rates to bank lending conditions
  • From 23 November 2022, interest rate on all remaining TLTRO III operations to be indexed to average applicable key ECB interest rates from that date onward
  • Existing interest rate calculation maintained for period up to 22 November 2022
  • Modification accompanied by three additional voluntary early repayment dates introduced for banks wishing to terminate or reduce borrowings before maturity

The recalibration of the TLTRO III terms and conditions will contribute to the normalization of bank funding costs. The ensuing normalization of financing conditions, in turn, will exert downward pressure on inflation, contributing to restoring price stability over the medium term. The recalibration also removes deterrents to early voluntary repayment of outstanding TLTRO III funds. Earlier voluntary repayments would reduce the Eurosystem balance sheet and, with that, contribute to the overall monetary policy normalization.

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