ECB ups rates, scraps bank subsidies

Posted on October 28, 2022Comments Off on ECB ups rates, scraps bank subsidies

Belgium, (Brussels Morning Newspaper) The European Central Bank (ECB) upped its deposit rate 75 basis points on Thursday as part of efforts aimed at curbing inflation.

The ECB also cut commercial bank subsidies on loans worth 2.1 trillion euro issued in the coronavirus crisis under the Targeted Longer-Term Refinancing Operations (TLTRO) facility, according to Reuters reporting on Thursday.

Commercial banks in the eurozone received the loans from the ECB at very low or negative interest rates and can now make guaranteed profit by keeping the TLTRO money at the ECB.

As the ECB continues to increase interest rates in a bid to rein in inflation, profit margins on such loans would continue to grow with each hike.

According to estimates based on the assumption that rates on such deposits would peak between 2.5% and 4.5%, the IÉSEG School of Management places risk-free profit of commercial banks, and losses of the ECB, between 30 and 35 billion euro.

The ECB announced it would scrap TLTRO subsidies, stressing that the rate on such loans will equal ECB’s deposit rate from 23 November onwards. It pointed out that the move will encourage banks to repay the loans early.

ECB announces more rate hikes

Commenting on planned rate hikes, ECB President Christine Lagarde confirmed that additional ones will follow and added that the bank may have to up rates beyond the neutral territory.

The rate currently stands at 1.5% and the neutral territory, while not strictly defined, broadly stands between 1.5% and 2%.

Noting that critics warn rapid interest rate hikes will push the eurozone into recession, Lagarde pointed out that her job is to maintain stability of prices. “We have to do what we have to do… a central bank has to focus on its mandate,” she stated.

Recession is looming due to rising energy prices and rates, Lagarde observed, but stressed that national government are responsible for helping their citizens weather crises.

With inflation in the eurozone at roughly 10%, the ECB is taking steps to cut its balance sheet worth nearly 8 trillion euro, which will likely add to growth of borrowing costs.

Lagarde announced the ECB will likely discuss plans to cut its government bond holdings soon and predicted that the discussion will be fractious.

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