To counter the record inflation, the European Central Bank (ECB) has decided to raise interest rates, the largest in its history. The key interest rate in the euro area rises by 0.75 percentage point to 1.25 percent, the ECB announced in Frankfurt on Thursday. At the same time, the ECB held out the prospect of further rate hikes in the coming months.
Lately, the pressure on Lagarde and Co had increased considerably. Because inflation in the eurozone is now rising to new highs. In August it rose to 9.1 percent and given the energy crisis caused by the war in Ukraine, there is no sign of the rise in inflation abating.
The rate is now more than four times higher than the ECB’s inflation target of two percent. Today’s interest rate decision is therefore also about the credibility of the ECB.
Interest rates must fight inflation
The Governing Council of the ECB had already announced a further interest rate hike of 0.5 percentage point before its meeting in September. But as inflation has continued to rise recently, the pressure on euro watchdogs to decide to take a bigger step has increased. Higher interest rates can counter rising inflation.
After much hesitation, the Governing Council of the ECB raised euro area interest rates for the first time in 11 years at its meeting on 21 July. To the delight of millions of savers, the central bank ended the negative interest rate policy phase: since then, commercial banks no longer have to pay 0.5 percent interest when they park money with the central bank. Many banks took the opportunity to abolish the so-called custody fees for their customers. The so-called deposit rate rises to 0.75 percent after Thursday’s ECB decision.
The ECB had long interpreted high inflation as temporary and initiated the turnaround in interest rates much later than many other central banks. For example, the US Federal Reserve has already raised its key interest rate several times, twice by 0.75 percentage point.
End of price increases not in sight
There is no end to price increases in the eurozone: In August, inflation in the currency zone of the 19 countries rose to a record high of 9.1 percent, driven by rising energy and food prices. Economists expect a further rise in the coming months. In the medium term, the ECB aims for a stable price level with an annual inflation rate of two percent for the single currency area.
Source: Krone
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
