European Central Bank: Key interest rate to rise by 0.25 points

The European Central Bank intends to raise interest rates by 0.25 percentage points in July. It would be the first increase in eleven years. In addition, the ECB then wants to end its net bond purchases worth billions.

The European Central Bank has announced the first rate hike in eleven years for its next meeting in July. The ECB announced that it intends to raise the rate by 0.25 percentage points. This should be followed up in September, even more so than in July if inflation remains high. As an important prerequisite for this, the ECB announced the end of the multi-billion dollar bond purchase program APP on July 1st.

The ECB has lagged behind so far

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 monetary authorities in Frankfurt 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.