ECB increases key interest rate to 0.50 percent
In view of record inflation, the European Central Bank (ECB) is raising interest rates in the euro area for the first time in eleven years.
In view of the record inflation, the European Central Bank is raising interest rates in the euro area for the first time in eleven years. The key interest rate rises unexpectedly sharply from zero to 0.50 percent, and there is no negative interest on parked funds.
In view of the significant increase in inflation, the European Central Bank (ECB) has now reacted and raised the key interest rate sharply for the first time since 2011. The monetary authorities around ECB boss Christine Lagarde decided to increase the so-called main refinancing rate by half a point to 0.50 percent. The deposit rate was also raised, to 0.00 percent. Banks no longer have to pay extra if they park excess money at the ECB.
The ECB’s turnaround is historic: it follows an era of ultra-loose monetary policy. However, the record inflation in the euro zone has now prompted the central bank to carry out unusually strong tightening maneuvers: fueled by increasingly expensive energy in the wake of the Ukraine war, consumer prices have recently risen by 8.6 percent. The ECB is thus clearly missing its inflation target. Because it strives for two percent as the optimal value for the economy.
New anti-crisis program
Accompanying the turnaround in interest rates, the monetary watchdogs have agreed on a new crisis program with which the ECB can help highly indebted countries like Italy in the event of turbulence on the bond market. The new instrument should help to ensure that monetary policy can have an even effect in the euro area and that the financing costs of the individual euro states do not diverge. The ECB therefore speaks of a tool against the fragmentation of the euro zone.
The ECB also held out the prospect of further tightening of its monetary policy. At the coming meetings, a further normalization of interest rates will be appropriate, the monetary watchdogs announced. The Governing Council would also move to an approach where interest rate decisions would be taken on a per-meeting basis. “The Governing Council’s future key interest rate path will remain data-driven and will contribute to the Governing Council’s medium-term inflation target of 2%.”
Economists expect further steps
Economists welcomed the step – albeit with restrictions. Jörg Krämer, Chief Economist at Commerzbank, said: “It’s good that the ECB has decided to take a big interest rate hike of half a percentage point today. But that can only be a start. The euro area, with its deep inflation problem, needs a series of large interest rate hikes to quickly bring the key rate above the so-called neutral level, which we see at just under three percent.”
Bastian Hepperle from Hauck Aufhäuser Lampe Privatbank also explained: “Ultimately, the inflationary pressure was too great and the inflation prospects too bad, so that the ECB Council decided to make a big step towards the key interest rate. The end of the negative interest rate policy is thus sealed. It will remain a stale aftertaste, since ECB President Christine Lagarde had until recently announced that a major interest rate hike would not take place until September.”
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