After the ninth interest rate hike in a row, the euro currency authorities are not ruling out a break for the first time. “We could raise interest rates, we could take a break,” said the President of the European Central Bank (ECB), Christine Lagarde, in Frankfurt with a view to the next meeting of the Governing Council in September. If the Council then decides to pause interest rates, this does not necessarily have to last for a long time.
“I can assure you that we are not cutting interest rates,” Lagarde said. The central bank will decide based on data from session to session. “We want to break the backbone of inflation. The data will show how much ground we still have to make up.”
The Governing Council of the ECB had previously decided to raise interest rates by 0.25 percentage points. The key interest rate, at which commercial banks can get fresh money from the ECB, has risen to 4.25 percent. The key interest rate was last this high at the beginning of the global financial crisis in early October 2008. Calls for an interest rate pause are becoming louder, also because the prospects for the economy in the euro zone have recently clouded over.
Chief Economist Kater: Inflation will fall significantly
“With this rate hike, the ECB’s job is done for the time being,” said Dekabank chief economist Ulrich Kater. “From now on, the window for further interest rate hikes is closing, because inflation will fall significantly in the autumn.” One must first wait and see whether the previous dose of interest rate increases is sufficient to drive out inflation in the long term.
If banks park money at the ECB, they will receive 3.75 percent interest in future. After years of zero and negative interest rates, the monetary authorities have been raising interest rates in an unprecedented series since July 2022 in view of the high inflation. The US Federal Reserve stepped up its fight against inflation after a pause on Wednesday and raised interest rates to their highest level in 22 years. It is now in the range of 5.25 to 5.5 percent.
ECB inflation target still far away
Higher interest rates make loans more expensive. This can slow down demand and counteract high inflation rates. Inflation eased off in June. According to the statistics office Eurostat, consumer prices in the currency area of the 20 countries were 5.5 percent above the level of the same month last year. In May, an annual inflation rate of 6.1 percent was recorded. However, the rate is still well above the ECB’s medium-term inflation target of two percent, at which it sees price stability maintained.
“We’re making progress, inflation is falling,” Lagarde noted. “But are 5.5 percent enough in June? Are we satisfied now? No!”
The President of the German Savings Banks and Giro Association (DSGV), Helmut Schleweis, warned that the ECB should first observe the further effects of its rate hikes. A break seems possible and advisable, but does not have to be the end of the increases.
According to Friedrich Heinemann, economist at the Mannheim-based economic research institute ZEW, there can be no question of the all-clear on inflation. “However, it is justifiable if the ECB takes a break now, lets the interest rate hikes take effect and, if necessary, increases them again in October.”
loss of consumer purchasing power
Higher inflation rates cause people’s purchasing power to dwindle: consumers can afford less for their money. They step on the brakes when it comes to consumption. This weighs on economic growth, for which private consumption is an important pillar. On the other hand, rising interest rates make loans more expensive for companies, which is why one or the other investment could fail. This is also slowing down the economy.
After years of lull, savers are benefiting from rising interest rates for call money and Co. According to calculations by the comparison portal Verivox, the average interest rate for call money offers nationwide was 1.31 percent (as of July 20, 2023). At the beginning of August 2022, it was only 0.05 percent. However, according to the information provided, 141 of the 738 financial institutions evaluated still have no interest on the call money account.
It is becoming more expensive for borrowers due to rising interest rates, and builders in particular are feeling the effects. According to the Bundesbank, interest rates for construction loans in Germany, which are based on the interest rates on federal bonds, have risen unexpectedly sharply in historical comparison since spring 2022. The analysis shows “that the banks in Germany have raised the interest rate for housing loans to private households since May 2022 more than would have been expected,” said the Bundesbank’s monthly report for June.
