MNI ECB WATCH: ECB Hikes 75bp, Changes TLTRO Terms

The European Central Bank raised key interest rates by 75bps Thursday, but signalled a likely slowdown in future tightening, as well as announced changes to the terms of its pandemic-specific cheap lending programme for banks.

The ECB raised its deposit rate to 1.5%, and increased the rate on its main refinancing operations and marginal lending facility rose to 2% and 2.25%, respectively. There is still ground to cover, ECB president Christine Lagarde said, with the future decisions made according to incoming data on a meeting-by-meeting basis.

But following its third rate increase in a row, and its second 75bps hike in two meetings, the Governing Council appeared to suggest a slowdown is likely, following “substantial progress” in the withdrawal of monetary policy accommodation.

“At some point in time we will have to identify the rate which will deliver the 2% target we have,” said Lagarde, adding that this was a process that “might well [take] several meetings.”

The ECB will consider the monetary policy transmission lag and the effects of the 200bps increase announced since July, as well as the growing likelihood of recession, in its future decisions, she said.

TLTROS

The decision to change retroactively the terms of the ECB’s pandemic-specific Targeted Longer-Term Refinancing Operations (TLTRO) was taken “for monetary policy reasons,” Lagarde said (see MNI SOURCES: ECB Seen Changing TLTRO Terms).

Interest on all remaining TLTRO III operations will be indexed to average key ECB interest rates from November 23, and there will be three additional voluntary early repayment dates. The ECB also brought the remuneration of reserves held at the central bank in line with the deposit facility rate.

The Governing Council did not discuss quantitative tightening, but will announce “key principles” in December, Lagarde said. That announcement will not signal the immediate implementation of the process, which will take the form of a gradual rolling off of reinvestments from APP, she said.

The ECB’s new Transmission Protection Instrument, designed to contain any blowout in eurozone spreads, was also not discussed, Lagarde said, adding that in considering whether to activate it, members would consider spreads and yields alongside a range of indicators.