With the fifth interest rate hike in a row, the euro monetary authorities are bracing themselves against the persistently high inflation. The European Central Bank (ECB) is again raising the key interest rate in the euro area by 0.50 percentage points to 3.0 percent. This was decided by the central bank council on Thursday in Frankfurt. A further interest rate hike has already been announced for the next monetary policy meeting on March 16th.
ECB President Christine Lagarde outlined this course back in December: “We have to go a long way.” In January, Lagarde reaffirmed the central bank’s determination: Interest rates would have to “continue to rise significantly and steadily” in order to curb inflation sufficiently, said the Frenchwoman.
The ECB is aiming for price stability in the euro area in the medium term with an inflation rate of two percent. This target has been a long way off for months. Although inflation weakened again in January, consumer prices in the currency area were still 8.5 percent above the level of the same month last year, according to an initial estimate by the statistics agency Eurostat. In Germany, the inflation rate was 8.6 percent in December. Above all, high energy and food prices are fueling inflation.
Bundesbank warnings of high inflation
Bundesbank President Joachim Nagel warned in a recent interview: “One must be careful not to sing the farewell to high inflation too soon.” Despite the decline, inflation is still “much too high,” said Nagel, emphasizing: “Interest rates must continue to rise.” He would not be “surprised” if the ECB “further increased key interest rates” after the two steps announced for February and March, said the Bundesbank President, who has a say in monetary policy in the Governing Council.
Higher inflation rates reduce the purchasing power of consumers, they can afford less for one euro. Rising interest rates can counteract high inflation rates because loans become more expensive and this slows down demand. At the same time, higher interest rates can dampen economic development in the currency area, which now has 20 countries and has been struggling with the consequences of the Ukraine war and a massive increase in energy prices for months.
The so-called deposit rate, which credit institutions receive when they park money with the ECB, rises to 2.50 percent after the ECB Council’s decision on Thursday. Since the ECB changed course in July, savers have benefited from rising interest rates for overnight and time deposits. However, high inflation is reducing returns.
