The European Central Bank increased the interest rate by 0.5 percentage points.

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The European Central Bank (ECB) raised the key interest rate slightly today, now to 3.5 percent.

On the rise, experts were already assuming another 0.5 percentage point hike. This is because, according to the estimates of the European Statistical Office, the average inflation rate in the EU region is still at a high level of 8.5 percent. Since July 2022, euro currency watchers have therefore increased interest rates five times to combat high inflation.

Recently, however, experts have predicted that the ECB will slow the pace of rate hikes. For example, the Macroeconomics and Business Cycle Research Institute in Düsseldorf (D) took into account the more cautious interest rate policy of the ECB after the bankruptcy of the Silicon Valley Bank. Confidence shaken in financial markets, which also affects Credit Suisse massive sales and hence lower stock prices of many banks. The trick: Banks hold huge amounts of government bonds, which lose value with each interest rate step, possibly leading to book losses for the banks.

As a result, the ECB had to decide whether to raise interest rates slightly in the name of banking stability or to raise interest rates sharply again to fight inflation.

Because monetary policy decisions always take time to take effect, many feared that the ECB had gone too far. The US Federal Reserve System (Fed) recently lowered interest rates, but is now flirting with accelerating rates again.

However, the ECB stressed: “The euro area banking sector is resilient: capital and liquidity positions are solid.”

Increasing interest rates on deposit accounts

The central bank aims for price stability in the euro area with an inflation rate of 2 percent in the medium term. This goal has been far away for months. Inflation has tended to weaken over the past few months, but slowly lately.

The so-called deposit rate that credit institutions receive when they deposit money with the ECB rose to 3.00 percent after the Governing Council’s decision on Thursday. Since the ECB changed course in July 2022, savers have benefited from increased interest rates for overnight and fixed-term deposits. However, high inflation lowers returns.

Source :Blick