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ECB Drains the Punchbowl for Economy and Banks

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The European Central Bank delivered its expected 75 basis-point increase in its official deposit rate Thursday, taking it to 1.5%. But the decision came with a dovish tilt that acknowledges the deteriorating growth outlook, as well as an attempt to stop banks from profiting from the swift change in the monetary stance seen in recent months. More than ever, policy makers find themselves fighting on several fronts at once.

President Christine Lagarde emphasized that the economic slowdown seen in the euro zone third quarter will deepen into next year. While she said that several more hikes were possible to combat double-digit inflation, traders scaled back their expectations for December’s move to just 50 basis points. Discussions about future ways to reduce the central bank’s €5 trillion ($5 trillion) balance sheet will also take place that month. In other words, quantitative tightening isn’t…

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