By Geoffrey Smith
Investing.com -- The European Central Bank raised its key interest rates by another 75 basis points and said it plans to hike further in its battle to bring inflation down from a 40-year high.
"With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation," the ECB said in a statement detailing its decisions.
As such, the key deposit rate - which sets the floor for Eurozone money markets - will rise to 1.50%, while the refinancing rate rises to 2.00% and the marginal lending rate rises to 2.25%.
The euro weakened slightly in response as markets zeroed in on a subtle change in its language that suggested it may only hike once more before stopping its tightening cycle.
The bank also said it will tweak the conditions of some outstanding operations, known as TLTRO III, in order to tighten financial conditions further. The operation had extended large-scale, ultra-cheap loans at the height of the pandemic. Developments since then have made it redundant and arguably added to the pressures that have driven annual Eurozone inflation to 9.9%
"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 ECB said.
The conditions on the TLTRO III loans had allowed banks to borrow from the ECB at rates as low as 50 basis points below the deposit rate, depending on how much of that preferential funding they passed on to households and companies. As the ECB has raised rates, the incentive to 'park' those funds back at the ECB's deposit facility has increased, resulting in a de facto subsidy to Eurozone banks running into billions of euros.
That subsidy has been evident in a number of Eurozone banks' earnings reports in the last week. A number of reports had cited ECB officials as fretting over the poor optics of such a subsidy regime at a time when households are struggling with surging bills for energy, food and other essentials.
The ECB will publish the new terms of the TLTRO III operations at 09:45 ET (13:45 GMT).