The key interest rate is currently zero percent. At the same time, inflation in the euro zone is shooting up to record highs. The key interest rate is intended to remedy this. For the first time in eleven years, the European Central Bank has announced its increase.
The European Central Bank (ECB) has announced the first rate hike in eleven years for its next meeting in July. It intends to raise the rate by 0.25 percentage points, the Governing Council announced at its external meeting in Amsterdam. This should be followed up in September, even more so than in July if inflation remains high. As an important prerequisite for this, she announced the end of the multi-billion dollar bond purchase program APP – on July 1, 2022.
The key interest rate is currently zero percent, the penalty rate for deposits from commercial banks at the ECB is minus 0.5 percent. The European monetary authorities are lagging behind other major central banks such as the American Fed or the Bank of England when it comes to monetary policy. They had initiated the turnaround in interest rates months ago.
Higher interest rates make the euro more attractive to investors, which can boost its value and thus make imports of commodities and energy cheaper. This in turn can dampen inflation. The inflation rate in the euro zone is currently at a record high of 8.1 percent. Higher interest rates also make credit for consumption and investments more expensive. That should dampen demand, which in turn could limit inflation.
However, the already ailing economy – which is suffering from the consequences of the pandemic, the Russian war against Ukraine and material shortages – is threatened with a further damper. A rise in interest rates will also make borrowing more expensive for the euro countries, which is likely to put a strain on the budgets of heavily indebted countries such as Greece and Italy in particular.
