The European Central Bank (ECB) has once again decided to take a major interest rate hike: the central bank is raising interest rates by 0.75 percentage points.

The actual base rate, the main refinancing rate, will rise to 2 percent.

The deposit rate that banks have to pay for their deposits at the central bank will be doubled to 1.5 percent.

And the top lending rate that banks have to pay for overnight deposits rises to 2.25 percent: all rates that few could have imagined just a few years ago.

All this should now become reality on November 2nd.

Christian Siedenbiedel

Editor in Business.

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ECB President Christine Lagarde said in the press conference after the Governing Council's interest rate decision on Thursday that significant progress had now been made towards normalizing monetary policy - but that there was still work to be done.

Lagarde did not want to be too specific about how many interest rate hikes were still pending and how high the central bank would have to set the key interest rate overall in order to bring inflation in the euro zone from the current 9.9 percent back to the central bank's target of 2 percent.

For example, it could be disputed whether interest rates will be raised again at the next interest rate meeting in December, as they are now, by 0.75 percentage points or only by 0.5 percentage points or less.

However, Lagarde left no doubt that the interest rate hikes should continue: One goal is to restore price stability.

However, the exact path and the individual interest rate steps will be decided “meeting by meeting”, i.e. anew at each meeting.

Lagarde responded coolly to criticism from politicians of the ECB's rate hike course, for example from Italy's new Prime Minister Giorgia Meloni.

Meloni had argued quite harshly that rising interest rates not only hurt indebted countries, but also companies and families.

French President Emmanuel Macron had previously criticized that the goal could not be to lower inflation by breaking demand in Europe.

Inflation in Europe “far too high”

Lagarde said she never commented on political debates.

But the ECB has a clear mandate to restore price stability.

"That's our job." When pursuing this goal, however, one also has in mind all those people who belong to the most vulnerable groups in society and who are particularly affected by inflation.

Inflation in Europe is "far too high," Lagarde admitted.

It will also remain above the ECB target of 2 percent for a long time.

The drivers of inflation continue to be the prices for energy, above all for gas and electricity, and food.

But the price pressure is getting “broader”.

Risks to economic growth are "pointed down" and those to the inflation outlook are "pointed up".

In particular, energy prices at the consumer level posed upside risks for inflation. The ECB President also addressed the possibility that collective bargaining with high wage demands could boost inflation – as well as the supply shortages on the supply side.

The Governing Council of the ECB has also decided to put an end to the "windfall profits", the risk-free profits of the banks through the long-term loans known as "TLTRO".

During the pandemic, these loans were granted to the banks on favorable terms in order to support the economy's supply of credit and ban the risk of deflation.

At the time, the ECB had not expected inflation and interest rates to rise as quickly as Lagarde freely admitted.

Now the banks could invest the money from these loans at higher interest rates with the ECB.

That had recently caused resentment.

The central bank now wants to put a stop to this.

For "monetary policy reasons," as Lagarde pointed out, not for equity considerations.

Mixed reactions from economists

The TLTROs, as they are, are now impeding the "transmission" of monetary policy.

For this reason, the interest rates are to be adjusted to the average key interest rate on November 23rd.

At the same time, the central bank wants to offer the banks additional dates for voluntary repayment.

The ECB is also changing the regulations on minimum reserves for banks at the central bank.

Interest is now to be paid on these minimum reserves at the ECB deposit rate.

Lagarde also said that the TPI program, with which the ECB wants to support the bonds of highly indebted countries if yields rise too much, was not discussed this time in the Governing Council.

The December meeting of the Council will decide on the basic guidelines for the future reduction in bond holdings.

Economists' reactions to the rate hike were mixed.

Ulrich Kater, the chief economist at Dekabank, called the sharp rise in interest rates the "only right signal".

Jan Holthusen from DZ Bank criticized that the ECB was "too late".

Carsten Brzeski, chief economist at ING, has already warned that with this interest rate hike the ECB has "come very close to the point" at which a normalization of monetary policy could turn into a restrictive monetary policy.

The financial markets reacted calmly to the interest rate hike.

The Dax fell at times by 0.3 percent to 13,151 points, and the other European stock exchanges also reacted with little surprise.