The European Central Bank wants to do something about the galloping inflation in the euro zone – and is once again raising the key interest rate sharply. For the second time in a row, 0.75 percent is beaten on top. And it shouldn’t have been the last climb.
The European Central Bank (ECB) is fighting against the record after record inflation in the euro area with another mega interest rate hike. The currency watchdog around the head of the central bank, Christine Lagarde, decided to raise the key interest rate by 0.75 points to 2.0 percent. The deposit rate, which is decisive on the financial markets, was increased by the same amount to 1.50 percent. After September, this is the second XXL interest rate hike in a row and already the third tightening step overall.
At the same time, the monetary watchdogs signaled their willingness to raise interest rates further: the Governing Council of the ECB “assumes that it will continue to raise interest rates,” it said. The monetary watchdogs are reacting to the ongoing price surge with another large interest rate step.
Driven by rising energy and food prices as a result of the Ukraine war, the inflation rate climbed to 9.9 percent in September – the highest level since the founding of the monetary union. The rise in prices has affected more and more areas of the economy. Even without the volatile prices for energy and food, the rate of inflation has risen sharply recently. Inflation is now nearly five times higher than the central bank’s inflation target of 2 percent, which it considers ideal for the economy.
The currency watchdogs want to avoid that high inflation gets stuck in people’s minds. The calculus: If inflation expectations get out of hand, it will be even more difficult for the ECB to contain inflation again and move it towards its target mark.
In the run-up to the interest rate meeting, many monetary watchdogs had already spoken out in favor of resolving an unusually large interest rate hike of 0.75 percentage points. Bundesbank President Joachim Nagel had also called for a robust rate hike. ECB President Lagarde will probably be asked at the press conference after the interest rate decision how monetary policy will continue.
Economists recently assumed that the central bank would raise interest rates at its last interest rate meeting of the year in mid-December. In her estimation, however, she may then not tighten interest rate screws quite as much. Because energy prices had recently fallen again somewhat. In addition, the looming recession in the euro zone should ensure that the price pressure eases somewhat.
