Inflation in the euro area climbed to a record high of 9.1 percent in August. The ECB wants to take a historic step to preserve purchasing power in the euro area: it decides on the largest interest rate hike since the introduction of euro cash.
The ECB is bracing itself against record inflation with the largest rate hike since the introduction of euro cash in 2002. The monetary authorities around ECB boss Christine Lagarde decided to increase the so-called main refinancing rate by three quarters of a percentage point to 1.25 percent. The currency watchdogs are reacting to the escalating inflation, which recently reached a high of 9.1 percent.
The monetary authorities last raised the key interest rate at which banks can borrow money from the ECB from 0 percent to 0.50 percent in July. Economists believe that significantly higher interest rates are necessary to fight inflation effectively. With higher interest rates, the central bank can counteract rising inflation rates.
Inflation in the euro area climbed to a record high of 9.1 percent in August, driven by rising energy and food prices. Economists expect a further increase in the coming months. The ECB is aiming for a medium-term stable price level for the common currency area with annual inflation of 2 percent.
At the international central bank conference in Jackson Hole, USA, at the end of August, ECB Executive Board member Isabel Schnabel warned that action should be taken to combat persistently high inflation. “The longer inflation remains high, the greater the risk that the public will lose confidence in our determination and ability to maintain purchasing power,” Schnabel warned.
However, the monetary authorities are also concerned that the economy, which is already having to do with supply bottlenecks and the consequences of the Ukraine war, for example on the energy market, will be slowed down by normalizing the monetary policy, which had been ultra-loose for years, too quickly. The ECB therefore reserves the right to help heavily indebted euro states by buying bonds. The ECB had long interpreted the high inflation as temporary and initiated the turnaround in interest rates much later than many other central banks.
