Status: 12/15/2022 4:04 p.m
The European Central Bank increases the key interest rate in the euro zone by 0.5 percentage points. The fact that interest rates are no longer rising as significantly as they have recently is also due to a dilemma for the central banks.
The European Central Bank is raising the key interest rate by 0.5 percentage points in order to counteract high inflation in the euro zone. This was decided by the European currency watchdogs at their meeting in Frankfurt am Main. The deposit rate, which is decisive on the financial markets, was increased by the same amount to 2.00 percent.
Numerous council members had already spoken out in favor of raising the key interest rate by just 0.5 percentage points and not by 0.75 percentage points, as was the case recently, such as the French central bank chief François Villeroy de Galhau. The ECB’s chief economist also said recently that he sees few arguments for a large interest rate hike of 0.75 percentage points.
Further rate hikes could follow
Nevertheless, this should not have been the last rate hike by the European Central Bank. Because the central bankers announced that there could be further interest rate hikes in the coming months: “The key rate decisions of the Governing Council of the ECB will continue to depend on the data situation and will be determined from meeting to meeting,” it said.
Economists surveyed by “Reuters” are clearly in favor of further interest rate hikes: “In view of persistent inflation, there is still no end in sight to interest rate hikes in the euro zone,” says Michael Heise, chief economist at HQ Trust. Friedrich Heinemann from the ZEW Institute agrees: “This rate hike shouldn’t have been the last step.”
Bond purchases are to be scaled back
At the same time, the ECB announced that it would gradually reduce its bond holdings from March next year. Funds from maturing securities of its multi-trillion-dollar general-buying program APP will no longer be fully committed to buying new bonds starting in March. By the end of the second quarter of 2023, inventories are to be reduced by an average of 15 billion euros per month.
In view of inflation that had been dangerously low for a long time, monetary authorities had started buying government bonds and other securities on a large scale in March 2015. So far, the monetary watchdogs have been replacing them completely in the portfolio.
Historical reversal
The main aim of the measures decided today by the European Central Bank is to combat high inflation in the EU. On the other hand, the ECB carried out a historic reversal in July of this year and, after more than a decade of consistently low interest rates, unexpectedly raised the key interest rate sharply. Since then, the ECB has raised interest rates several times, most recently by 0.75 percentage points.
Last year, the central bankers still thought it would work without raising interest rates. At the ECB meeting in December last year, interest rates were still untouched. At the time, ECB President Christine Lagarde thought a rate hike was “very unlikely”; according to ECB forecasts, inflation should fall below the target level of two percent by 2023 at the latest. If the inflation rate is around two percent, the central bankers in Frankfurt consider price stability to have been achieved. They try to achieve this goal with their monetary policy.
But exactly the opposite has happened since that meeting a year ago: instead of falling, the inflation rate in the European Union climbed from one record to the next before falling slightly again in November 2022 for the first time in months. In November, the inflation rate in the euro zone was 10.0 percent, after 10.6 percent previously.
The dilemma of the central banks
The fact that interest rates are no longer rising as significantly as in previous meetings also shows the dilemma in which central banks such as the ECB or the British central bank, the Bank of England, are currently stuck: on the one hand, the central banks want to combat the high rate of inflation with tighter monetary policy . On the other hand, the European economy is also suffering from the consequences of the war in Ukraine.
Energy and food prices in particular have risen since Russia began its war of aggression against Ukraine in February of this year. This is partly due to the numerous sanctions that the EU has imposed on Russia and which ensure that large quantities of Russian raw material supplies are no longer imported into the EU.
The central bank must therefore be careful not to overtax the economy with its tightening course. Because higher interest rates mean that borrowing becomes more expensive. As a result, fewer loans are taken out and consumption also falls. On the one hand, the inflation rate can be reduced, on the other hand, it could further weaken the already ailing economy. ECB chief economist Philip Lane recently made it clear that the euro monetary authorities assume that a possible recession “will be mild and short-lived”.