Turnaround in interest rates: Historic interest rate hike: ECB braces itself against record inflation

The European Central Bank (ECB) is bracing itself against record inflation in the euro area with a historic interest rate hike.

Turnaround in interest rates: Historic interest rate hike: ECB braces itself against record inflation

The European Central Bank (ECB) is bracing itself against record inflation in the euro area with a historic interest rate hike. For the first time in the history of the central bank, the ECB Council decided to raise interest rates by 0.75 percentage points. This increases the key interest rate at which commercial banks can borrow fresh money from the ECB to 1.25 percent, as the central bank announced on Thursday in Frankfurt. At the same time, the ECB held out the prospect of further interest rate hikes in the coming months.

The Governing Council of the ECB had already signaled a further interest rate hike of 0.5 percentage points for its September meeting. But because the rate of inflation has continued to rise recently, the pressure on the euro currency watchdogs to decide on a larger step has increased. Higher interest rates can counteract rising inflation rates.

After much hesitation, the Governing Council of the ECB raised interest rates in the euro area for the first time in eleven years at its meeting on July 21. To the delight of millions of savers, the central bank ended the phase of the negative interest rate policy: since then, commercial banks no longer have to pay 0.5 percent interest when they park money with the central bank. Many banks took this as an opportunity to abolish so-called custody fees for their customers. The so-called deposit rate rises to 0.75 percent after the ECB decision on Thursday.

The ECB had long interpreted the high inflation as temporary and initiated the turnaround in interest rates much later than many other central banks. The US Federal Reserve, for example, has already raised its key interest rate several times, twice by 0.75 percentage points each time.

There is no end in sight to the price increases in the euro zone: In August, inflation in the currency zone of the 19 countries climbed to a record high of 9.1 percent, driven by rising energy and food prices. Economists expect a further increase in the coming months. In the medium term, the ECB is aiming for a stable price level with annual inflation of two percent for the common currency area.

The high inflation is becoming an enormous burden for more and more people, Bundesbank President Joachim Nagel said recently. Nagel, who has a say in monetary policy in the Governing Council, spoke out in favor of a "major interest rate hike" in September and explained: "Further interest rate hikes can be expected in the coming months." Monetary policy must be resolute in combating high inflation.

At the same time, monetary authorities are 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 countries by buying bonds.

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