The European Central Bank will raise interest rates again on Thursday and likely reel in a key subsidy to commercial banks, taking another huge step in tightening policy to fight off a historic surge in inflation.
Fearing that rapid price growth is becoming entrenched, the ECB has already raised rates at the fastest pace on record, and there is little let-up in sight as unwinding a decade worth of stimulus could take it well into next year and beyond.
"The ECB is still in catch-up mode," BNP Paribas said. "We think there is now a comfortable majority for taking rates into restrictive territory."Unlike in September, no policymaker has openly opposed the idea of a 75 basis-point hike on Thursday, and markets have fully priced in such a move, suggesting an easy unanimity, especially since the U.S. Federal Reserve has also hinted at a similar increase.
Having borrowed at zero or even negative rates, banks can now simply park this cash back at the ECB for a positive, risk-free return, which rises with each deposit rate hike. This is essentially stopping rate hikes from getting fully transmitted to the real economy, so the ECB is likely to decide to change the terms of these so-called Targeted Longer-Term Refinancing Operations, or TLTROs, to encourage banks to repay them early.
"Changing the TLTRO terms could hit the ECB’s credibility and would lead to reluctance of banks to ever make use of the TLTROs in the future again," ING Economist Carsten Brzeski said.