The European Central Bank rate hike 27 October 2022

The European Central Bank raised its key interest rates by 75bps during its October meeting as expected. The Governing Council decided to raise the three key ECB interest rates by 75 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.00%, 2.25% and 1.50% respectively, with effect from 2 November 2022. The central bank also expects to raise interest rates further and will base future increases on the evolving inflation and economy, on a meeting-by-meeting approach. At the same time, the ECB changed the terms and conditions of the third series of TLTRO III, by adjusting the interest rates applicable from 23 November 2022, and offering banks additional voluntary early repayment dates.

After decision, ECB President says in press conference that ECB has not finished normalization. They are turning back to forward guidance avoid uncertainty. Also, she said that ECB will make further rate increases, but mainly they look at inflation outlook. About Asset Purchase programmes (APP), She explains they did not discuss substantive APP issues. Thus, ECB would pursue APP discussion to decide key principles in December.

Furthermore, Lagarde explains that economic activity in Europe area is likely to have slowed significantly in Q3. They expect the economy to slow down substantially over the remainder of the year and next year. Also, demand for services is slowing and labor market still performed well. In short, slowing economy could lead to some increase in the jobless rate.