banks are accelerating their repayment of cheap loans to the ECB

Banks in the euro zone will prepay 296 billion euros in cheap loans granted by the European Central Bank, which has recently tightened the conditions as part of its fight against inflation, the monetary institute announced on Friday.

This figure shows a clear progression compared to the last repayments made by the banks during the previous chances.

This acceleration is linked to the tightening decided by the Frankfurt institution during its last monetary policy meeting in December.

The three-year loans granted to banks between September 2019 and December 2021, for a total of 2.339 billion euros, provided monetary support during the most acute phase of the Covid-19 pandemic.

Called TLTRO 3, they were priced very cheaply – a negative rate of up to -1% – on condition that the banks redistribute this money in the form of loans to households or businesses.

The guardians of the euro have taken the decision to end these generous conditions retroactively. The total outstanding amount of these TLTRO 3 loans is still around 2,100 billion euros on the ECB’s balance sheet.

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Making the terms of TLTROs more onerous for banks reflects the ECB’s desire to start reducing its balance sheet, which has grown enormously in recent years, in order to support its fight against inflation.

In addition to this recalibration, the ECB’s main instrument for containing prices has been sharp increases in its key rates decided twice since July to raise the cost of credit and cool activity.

These interest rate hikes will continue, reaffirmed Christine Lagarde Friday in a Frankfurt speech. The President of the ECB estimated that the recession which threatens the euro zone will not be sufficient to stem the rise in prices.

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