Inflation in the eurozone has lately dropped. However, the ECB is still a long way from reaching its inflation objective. As a result, Europe's currency watchdogs boosted the main interest rate by 0.5 percentage point - and announced the next increase.
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| ECB raises key interest rate to 3 percent |
To combat the eurozone's rising inflation, the European Central Bank (ECB) decided to boost interest rates once again. The eurozone's benchmark interest rate will rise by 0.5 percentage point to 3 percent, the currency watchdogs declared today following their monetary policy meeting in Frankfurt. It is the sixth consecutive increase in interest rates. In December, the central bank raised interest rates by 0.5 percentage point. Thus, the eurozone's interest rate has increased to its highest level since the end of 2008.
However, ECB President Christine Lagarde believes that the struggle against rising inflation is far from done. At today's news conference in Frankfurt, she stated that the ECB will continue to hike interest rates slowly and considerably. A further half-point hike was planned for the March interest rate meeting. The remainder of the course should then be evaluated.
In the eurozone, inflation dipped to 8.5 percent in January from 9.2 percent in December. For the third month in a row, the rate fell. Core inflation, which includes volatile costs for energy, food, alcohol, and cigarettes, has recently held around 5.2 percent, according to monetary watchdogs.
The ECB is concerned that high inflation could become entrenched and that long-term inflation expectations could get off track.
In the medium run, the ECB hopes to achieve 2% inflation. According to the ECB, interest rates should not only rise consistently, but also remain at a level restrictive enough to ensure that inflation recovers to 2% within a reasonable time frame. Lagarde stated that all necessary steps will be done.
The ECB's most recent interest rate rise has been received with enthusiasm in the German economy and financial industry. "The 50 basis point hike in key interest rates is justified; future steps of similar size must follow," said Jörg Asmussen, General Manager of the German Insurance Association (GDV). The ECB's decision was made simpler by rising economic confidence and lately improving economic indicators.
"A more resilient economy will be better able to withstand the next rate hikes," added Asmussen, a former ECB governor.
The German Chamber of Industry and Commerce (DIHK) hailed the Governing Council's new interest rate decision as "inevitable": "Because the situation only appears to be more relaxed for businesses and individuals at first glance: in fact, core inflation is continuing to climb, so the inflation rate is primarily due to somewhat lower energy costs," noted Achim Dercks, deputy general manager of the DIHK. The war against inflation is far from done.
Andreas Bley, chief economist of the Association of German Volksbanken and Raiffeisenbanken (BVR), feels that the eurozone's inflationary pressures remain much too high. "The ECB has also realized this and responded consistently in raising the main interest rate by 50 basis points to three percent today."
Helmut Schleweis, President of the German Savings Banks and Giro Association, applauded the interest rate increase. The March announcement of another study was likewise "quite extraordinary," he noted. The Association of German Banks expressed the hope that "the European currency watchdogs would also be better equipped to contain and control long-term inflation expectations".
Tight monetary policy, according to the idea, raises the danger that central banks may slow the economy to the point of stalling. However, the eurozone economy has recently performed better than projected. "Overall, the economy has shown to be more resilient than projected, and it is likely to rebound in the next quarters," said the governor of the central bank. She mentioned company optimism, alleviating supply constraints, and stable gas supply.
The Eurozone enjoyed relatively small growth in the last three months of 2022, but this was mostly attributable to an unusually mild winter and Ireland's performance. According to an ECB study, banks are restricting loans for the first time since the 2011 debt crisis, which is normally a sign of weaker growth and declining inflation. According to Lagarde, the chances of even greater inflation are less evident overall. The situation has recently improved due to lower energy prices. If this trend continues, inflation rates may decrease swiftly again, but this is not guaranteed.
Interest rate hikes also in Great Britain and USA
With its interest rate rise, the ECB is following the monetary policy decisions of the United Kingdom and the United States. Today, the Bank of England boosted interest rates by half a point to 4%. As a result, the central bank is raising the key interest rate even higher. In light of recent 10.5 percent inflation, the British monetary authorities are under pressure to act. Yesterday, the Fed boosted interest rates by 0.25 percentage point. The ninth consecutive rise represents the weakest move since March. The main interest rate is currently in the 4.5 to 4.75 percent band. However, the United States' central bankers have definitely paused the rate rises. In the United States, inflation has lately weakened dramatically.
In December, consumer prices rose by 6.5 percent compared to the same month last year. In November it was still 7.1 percent. It was the sixth consecutive drop in inflation.
Powell, on the other hand, guaranteed more rate rises. It is too soon to declare "success" in the battle against excessive consumer costs. "We believe there is still more to be done." However, the words made by Fed Chair Jerome Powell yesterday would have appeared less "hawkish," Commerzbank stated this morning in response to the US interest rate decision.