The ECB is continuing its measures to combat inflation and is raising key interest rates for the seventh time in a row 0,25 percentage points. This decision was made by the euro monetary authorities under the leadership of ECB President Christine Lagarde in Frankfurt. The increase was expected by experts. The main refinancing interest rate is now 3,75 percent and regulates the interest rate, to which banks are located over a longer period of time (at least a week) Can borrow money from the central bank. The deposit rate, which is important for savers, is as of today 3,25 percent.
The ECB is thus following the American monetary authorities at the Federal Reserve, which also involves a more moderate interest rate increase 0,25 percentage points had been announced. It is the seventh consecutive interest rate hike, since the ECB in July 2022 has moved away from its long-standing ultra-loose monetary policy and initiated a turnaround in interest rates. Despite this renewed increase, the ECB has slowed the pace significantly. The central bank has increased key interest rates more recently, They were even raised by half a percentage point in March.
The turmoil in the banking sector in recent weeks has probably contributed to this, that the central bank is acting a little more cautiously and the key rates are only changing 0,25 percentage points increased. After the crisis at Credit Suisse and the collapse of two US financial institutions in March, First Republic Bank recently had to be rescued through a takeover by JP Morgan Chase. There is also a threat of another bank failure with the US regional bank Pac West.
To keep inflation under control, is the classic task of central banks. Higher inflation leads to a devaluation of money, as a result of which consumers can afford less and less for one euro. Interest rates rise, Individuals and companies have to spend more money on loans or borrow less money. This causes growth to decrease, Companies cannot simply pass on higher prices and ideally the inflation rate falls. But at the same time there is danger, that this will stifle the economy. In the Eurozone, inflationary pressure increased somewhat again in April. Consumer prices are up compared to the same month last year 7,0 percent increased. In March the rate fell significantly, von 8,5 percent in February 6,9 percent. The ECB is aiming for an inflation rate of two percent in the long term. “Inflation is like toothpaste: It squeezes out of the tube easily, but very difficult to get back in”, former Eurogroup leader Jean-Claude Juncker once warned.
Core inflation, which is currently receiving a lot of attention, fell slightly in April. In core inflation, foods are susceptible to fluctuations- and energy prices are taken out. According to the chief economist of VP Bank, Thomas Gitzel, The decline in core inflation could be the first sign of a turnaround in inflation developments. Despite the increased inflation rate, this is still not an argument for the ECB, stop the interest rate increases. However, there are signs of this, that banks have further tightened their credit standards in the first three months of the year due to the previous interest rate increases, according to an ECB survey. The chief economist at Commerzbank, Jörg Kramer, expects the key interest rate hikes to end soon. He assumes so, that the ECB at a deposit rate of 3,50 Percent will take a longer break after the next two sessions. In contrast to many financial market experts, Krämer does not expect any interest rate cuts next year, since the interest rate level is unlikely to be sufficient, to sustainably reduce inflation to two percent.