Oct. 27 (UPI) -- The European Central Bank announced it is raising interest rates by 75 basis points Thursday, marking the third increase of the year.
The move is meant to guard against continuing inflation, the ECB said in a news release. Along with the increase, it is also reducing its support for European banks. Further rate increases are expected.
"Inflation remains far too high and will stay above the target for an extended period," the press release said. "In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation."
Euro area inflation reached 9.9% in September, up from 9.1% in August. The ECB aims to reduce inflation to 2% swiftly.
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Interest rates on refinancing operations, the marginal lending facility and the deposit facility will increase to 2%, 2.25% and 1.5% beginning Nov. 2. The Governing Council will continue to reinvest full principal payments from maturing securities purchased under the asset purchasing program. The same is true for pandemic emergency purchase program securities at least through the end of 2024.
The Governing Council is changing the terms and conditions of the third series of targeted longer-term refinancing operations. This was a tool used to counter the risks of price stability while the pandemic had forced widespread lockdowns. As global economies grapple with rampant inflation, the council believes it is prudent to reconsider the specifics of these operations.
TLTRO III are operations that provide financing to credit systems in the European Union. Banks are offered long-term funding with conditions meant to encourage borrowing and stimulate a bank's economy. By scaling these operations back, the ECB is moving away from actions seen as subsidizing banking operations. Banks will be offered voluntary early repayment dates.
The move will cause the cost of lending to rise sharply for banks as rates come to more closely match market conditions.
"Finally, in order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB's deposit facility rate," the ECB press release said.
