The European Central Bank has raised the key interest rate to 0.5 percent because of the record high inflation, as the ECB Council announced after its meeting in Frankfurt on Thursday. This is only a first step, further rate hikes will follow this year. The interest rate decision was higher than expected, actually only 0.25 percentage points had been expected. The reason: Inflation in the euro zone accelerated further in June and once again reached a record level. Compared to the same month last year, consumer prices increased by 8.6 percent.
This is the end of the central bank’s long-standing zero interest rate policy. The banking sector has already reacted to the expected turnaround in interest rates in recent weeks. Real estate loans and other loans have become more expensive. Compensation is again being paid on savings accounts, but the interest rate by no means offsets inflation.
The key interest rate for the euro zone has been zero percent since 2016, and banks have had to pay negative interest on their deposits with the central bank since 2014. Most recently it was 0.5 percent – now the rate is zero percent. At the same time, the central bank has bought government and corporate bonds worth around five trillion euros since 2015. These purchase programs have now expired.
As a result of the interest rate hike, euro member states will also have to reckon with higher borrowing costs. At the same time, there could be a recession as a result of the gas shortage caused by Russia. In this mixed situation, a renewed euro debt crisis threatens. Lending rates for Italy have risen recently. The ECB wants to be prepared for this and therefore presented a new instrument for emergencies on Thursday. Should there be price turbulence on the bond markets, the central bank would buy the government bonds of the affected euro members.
The ECB was recently under strong pressure to finally raise interest rates. Other important central banks such as the American Federal Reserve and the Bank of England ended their low interest rate policy many months ago. The higher interest rates in the USA have meanwhile contributed to the strong appreciation of the US dollar against the euro – with negative consequences for Europe: Because raw materials are invoiced in dollars, import costs have increased accordingly, which has increased inflationary pressure.
Prices have been rising worldwide for a good year and a half now. Initially, all central bankers believed that this was a temporary phenomenon. The surge in inflation will subside as soon as the supply bottlenecks caused by the corona pandemic are resolved. But the lack of supply persisted, Russia’s war against Ukraine tightened the supply for the energy supply: The price surge therefore solidified.
ECB President Lagarde has now admitted that the central bank underestimated the stubbornness of inflation. The last rate hike was decided by the ECB in 2011 under President Jean-Claude Trichet – at that time the inflation rate was almost three percent.