The European Central Bank announced Thursday a 75-basis-point interest rate hike — its third consecutive increase this year — while also scaling back support for European banks.

Following much speculation by market participants, the ECB said it was now changing the terms and conditions of its targeted longer-term refinancing operations, or TLTROs. These are a tool that provides European banks with attractive borrowing conditions, designed to incentivize lending to the real economy.

However, because the ECB has been increasing rates faster than expected in the face of soaring inflation, European lenders are benefiting from both TLTROs and higher interest rates. The situation has been described by some as effectively providing a subsidy to banks.

“During the acute phase of the pandemic, this instrument played a key role in countering downside risks to price stability. Today, in view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated,” the ECB said in a statement.

It said the interest rates applicable to the tool, known as TLTRO III, would be adjusted from Nov. 23 and banks would be offered voluntary early repayment dates.

“In order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate.”

This will see the cost of lending for banks rise significantly under the scheme.

Further details on the new conditions for European banks will be published at 2:45 p.m. London time.

The ECB did not shed any light on when it plans to start reducing its balance sheet, however, in a process known as quantitative tightening — something market participants had been watching out for.

The euro weakened against the U.S. dollar in the wake of the announcements from the ECB. The common currency briefly fell below parity before recovering slightly. European government bond yields also fell following the ECB’s decision.

More rates hikes ahead

Thursday’s rate hike takes the ECB’s main benchmark from 0.75% to 1.5%, a level not seen since 2009 before the sovereign debt crisis. It comes after the central bank rose rates by 50 basis points in July and 75 basis points in September.

However, the ECB confirmed that its rating hike cycle is not yet over.

“With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target,” the central bank said.

Several economists have projected another rate increase in December of 50 basis points. The ECB, however, did not indicate the level of future rate rises, saying that they will be data-dependent.

It comes as the ECB is dealing with both record-high inflation and a slowing economy, with many economists predicting a recession in the region before the end of the year. It’s a delicate balance for the central bank, as if it hikes rates aggressively in an effort to deal with inflation, it could cause even more trouble for the wider economy.

“Inflation remains far too high and will stay above the target for an extended period,” the ECB also said Thursday.

In September, inflation in the 19-member bloc came in at 9.9%.