The European Central Bank is raising interest rates – stronger than ever since the introduction of the euro. This helps in the fight against inflation, but fuels the risks of a recession. Nevertheless, the decision was without alternative.
Finally! The European Central Bank has been silent for far too long. The central bankers in Frankfurt’s Euro Tower did not appear to be bothered by the fact that inflation rates have been climbing steadily for months. Now they act and raise interest rates for the second time in a short space of time.
The key interest rate rises significantly – by a whopping 0.75 percentage points. This is important to curb the current inflation. Even if the move increases the risk of a recession. But the damage caused by inflation is even more painful for an economy and combating inflation at a later date will be much more expensive.
Of course, today’s increase alone will not be enough to noticeably slow down inflation. Monetary policy is still too expansive for that. The central bankers have not really started to reduce their holdings of government bonds they have bought. Bonds that have expired are still being replaced by new ones.
In Germany in particular, inflation rates will remain at a high level for the time being. We will probably still see double-digit inflation rates this year. A whole series of inflation-dampening measures – the 9-euro ticket and the fuel discount, for example – expired at the end of August. Traveling by car or train is becoming more expensive again for many. And there is no end in sight to the crazy prices for electricity and gas.
It also takes time for interest rate hikes to take effect. The decision makes loans more expensive, making investments more expensive. This puts pressure on demand and thus prices. It will be months before this becomes noticeable.
And even if inflation rates drop in the medium term, life will not become cheaper as a result. If the price increase is slowed down, the goods and services will just not become more expensive as quickly as they are at the moment. Prices will not fall below the current level.
Nevertheless, a lot would have been achieved if the latest ECB decision helped ensure that inflation does not get out of control. Lagarde would then have prevented the central bank from losing credibility.
