European Central Bank raises interest rates for the first time since 2011: “Dismal outlook in the eurozone” | Economy

The effects of the armed conflict, with inflation at record highs and a lot of uncertainty in the economy, are leading to gloomy prospects for the second half of 2022 and beyond, the French said after the ECB decided to raise interest rates for the first time since 2011 in a attempt to curb rising prices. HNE/SVR/

Energy prices in particular have risen sharply since the Russian invasion of Ukraine. As a result, the central bank had to intervene. Interest rates may rise even further later this year, but the ECB will not comment on the extent of future interest rate steps in today’s interest rate decision.

When the ECB raises interest rates, banks generally also raise their mortgage rates, for example. Many banks have already done this in recent months, because they foresee that the central bank would take this step. Borrowing is now becoming more expensive, which is expected to result in people and companies spending less money, causing demand in the economy to decrease and prices to rise less rapidly in the long run.

Interest rates had been reduced to historically low levels by the central bank over the years. The ECB did this to boost the eurozone economy. The so-called deposit rate has even been 0.5 percent below zero for a long time. This interest rate now goes to 0 percent. This means that banks no longer have to pay for money that they temporarily store at the ECB.

Critics accuse the ECB that the interest rate hike comes much too late. Inflation in the eurozone has been rising to record highs for months. At the same time, the economic outlook has deteriorated as a result of the war in Ukraine. In this environment, if the ECB raises interest rates too quickly, it could become a burden, especially for the highly indebted countries of Southern Europe.

To ensure that interest rate hikes do not overburden countries such as Italy, which is also struggling with a government crisis, and to avoid a fragmentation of the currency zone, the ECB is launching a new anti-crisis program called the Transmission Protection Instrument (TPI).

“The TPI will complement the Governing Council’s toolbox and can be used against unjustified, disorderly market developments that pose a serious threat to the transmission of monetary policy across the euro area,” the central bank said. “The magnitude of TPI purchases depends on the severity of the risks to policy transmission. The purchases are not limited in advance.”

Interest rates had not been adjusted since the appointment of ECB President Christine Lagarde in November 2019. The last time interest rates in the eurozone were raised was when Frenchman Jean-Claude Trichet was still the top boss at the ECB. His successor Mario Draghi has only implemented interest rate cuts since the end of 2011.

Also read: Paul D’Hoore explains what the interest rate increase means for you: “Borrowing is becoming more expensive, savings accounts do not immediately give more return” (+)

See also: ECB already announced in June to raise interest rates to combat sky-high inflation