The European Central Bank (ECB) will raise interest rates by 0.5 percentage points, as announced on Thursday. The key interest rate is therefore 2.5 percent.
The ECB has raised interest rates several times this year to counter the rapidly rising inflation. This seems to have an effect: Eurozone inflation fell to just 10.0 percent from a record low in November.
The ECB is following the Swiss National Bank (SNB) with a rate hike. This had increased interest rates by 0.5 percentage points Thursday morning. The key interest rate in Switzerland is currently 1.00 percent. Inflation in this country is also much lower. In November, inflation remained unchanged at 3.0 percent compared to the previous month.
In the fight against stubbornly high inflation, euro money watchers are raising interest rates for the fourth time in a row.
First of all, the key interest rate at which commercial banks can borrow fresh money from the ECB will rise to 2.50 percent, as the central bank announced in Frankfurt. However, given the growing concerns about the economy, the hike is slightly smaller than the previous two rate hikes.
ECB cuts bond holdings
At the same time, the central bank wants to reduce the billions of dollars in bonds that euro central banks have bought in recent years.
Beginning in March 2023, all funds from maturing securities of the trillion-dollar general purchase program APP will no longer be invested in the purchase of new bonds. By the end of the second quarter of 2023, it is planned to reduce inventories by an average of 15 billion euros per month.
The ECB had already stopped buying new securities on July 1, 2022. Overall, the central bank has invested more than 3.4 trillion euros in government bonds and corporate securities through the end of November this year as part of the program in use since March 2015. The ECB is sending another signal to fight inflation with its decision to curb the flow of money.
The central bank aims for medium-term stable prices in the eurozone, which has an inflation rate of two percent. Monetary authorities are currently far from this goal. In November, inflation in the common currency of 19 countries was 10 percent. Inflation peaked at 10.6 percent in October.
“Mild and short-lived” recession
Higher interest rates make loans more expensive, which slows demand and can offset higher inflation rates. But it could also dampen economic development in the currency space, which has been dealing with the consequences of the Ukrainian war and the massive rise in energy prices for months.
However, according to the latest statements by ECB chief economist Philip R. Lane, monetary authorities assume that a possible recession will be “moderate and short-lived”.
The so-called deposit interest rate that credit institutions charge when they park money at the ECB rises to 2.00 percent after Thursday’s decision. Savers now benefit from increased interest rates for overnight and time deposits.
However, high inflation lowers returns. “Even the best time deposit accounts cannot compensate for high inflation. But at least they serve to limit the damage,” says the latest issue of the “Finanztest” magazine.
After a long hesitation, the ECB Governing Council raised interest rates in the eurozone for the first time in eleven years at its meeting on 21 July. This was followed by two historic increases of 0.75 percentage points each. Currency watchers have long interpreted hyperinflation as temporary and therefore initiated the change of course later than, for example, the US Federal Reserve.