Despite the recent turbulence in the banking sector, the monetary authorities of the euro will not be dissuaded from their fight against high inflation. The Governing Council of the ECB decided to raise the key interest rate in the euro area by a further 0.5 points to 3.5 percent. It was the sixth rate hike in a row. “We are determined to fight inflation. That should not be doubted,” said ECB President Christine Lagarde on Thursday in Frankfurt. “There is no trade-off between price stability and financial stability.”
The collapse of several smaller US banks and concerns about the major Swiss bank Credit Suisse had awakened memories of the global financial crisis that followed the Lehman bankruptcy around 15 years ago. “The banking sector is much, much stronger than it was in 2008,” Lagarde said. The sector is resilient and capital and liquidity positions are solid. The ECB also has all the monetary policy instruments to support the euro area’s financial system with liquidity support if necessary.
Peucker: No all-clear yet
The central bank has not committed itself to the future. Lagarde emphasized that further decisions would be made on the basis of data. Henriette Peucker, deputy general manager of the banking association, warned that the ECB should continue on its course. “Even after today’s interest rate hike, there is still no all-clear for inflation in the euro zone.”
Commerzbank chief economist Jörg Krämer sees the interest rate hike as an investment in the credibility of the ECB. “With her courageous decision on interest rates, she has underlined that she does not want to be swayed from her goal of price stability anytime soon.”
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 has generally weakened over the past few months, it has only been slow of late. In February, the inflation rate in the common currency area was 8.5 percent after 8.6 percent in January. Inflation was initially fueled primarily by higher energy and food prices. In the meantime, the price increase is affecting more and more areas of life.
“Although high interest rates threaten to weaken economic output, persistently high inflation could cause even greater economic damage. That’s why the ECB’s course is the right one,” said Helmut Schleweis, President of the German Savings Banks and Giro Association (DSGV).
inflation rates and purchasing power
According to the forecast made at the beginning of March, the central bank expects slightly lower inflation and stronger economic growth in the euro zone than three months ago. In 2023, it expects an average inflation rate of 5.3 percent in the common currency area, which now has 20 members (December: 6.3 percent). The economy is expected to grow by 1.0 percent, faster than the 0.5 percent predicted in December.
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. However, sharply rising interest rates can put banks under pressure, as was recently shown by the collapse of the Silicon Valley Bank in the USA.
Experts consider a global financial crisis like the one that followed the collapse of the Lehman Bank to be unlikely. According to Martin Wansleben, General Manager of the Association of German Chambers of Industry and Commerce (DIHK), the latest interest rate hike shows “that the ECB considers the risks to financial stability to be manageable”.
The so-called deposit rate, which credit institutions receive when they park money with the ECB, rises to 3.00 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.
