Highlights:

• At today’s meeting the Governing Council (GC) lifted its key rates by another 75 bps, in line with expectations. 
• The ECB also announced new measures incentivizing banks to repay TLTRO holdings earlier. It will link TLTRO III interest rates to less favourable terms (the average of applicable key rates) and it also decided to lower the remuneration of minimum reserves to the ECB’s deposit facility rate.
• The key rationale is, as inflation remains “above the target for an extended period”, to reduce “support for demand and guarding against the risk of a persistent upward shift in inflation expectations.”
• The GC stated that it “expects to raise interest rates further” but also finds that it “made substantial progress in withdrawing monetary policy accommodation” while reiterating its “meeting-by-meeting approach” to interest rate decisions”. Also, the statement no longer points at further rate hikes “over the next several meetings”. 
• The market response was on a very dovish note with yields and EUR falling and euro area non-core bond spreads tightening, likely due to the more cautious assessment of the rate outlook. 
• We continue to look for a 50 bps hike in December and another 50 bps in Q1/2023. But we expect the ECB to increasingly focus on quantitative tightening (QT) as President Lagarde stated that at the December meeting the key principles of the reduction of purchases made under the Asset Purchase Programme (APP) will be released. 
   

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