FRANKFURT (dpa-AFX) – The record inflation in the euro area is driving the euro monetary authorities to the greatest rate hike the history of the ECB. The central bank is raising the key interest rate in the euro area by 0.75 percentage points to 1.25 percent, despite growing concerns that the economy will plunge into recession. The inflation rates are “still clearly too high”, explained the President of the European Central Bank (ECB), Christine Lagarde, on Thursday in Frankfurt. The Governing Council of the ECB agreed that further interest rate hikes were likely in the coming months. Banking associations and economists in Germany welcomed the fact that the central bank is now moving at a faster pace from its ultra-loose monetary policy adopted.
Investors can hope for interest on the savings account again after years of slack. This is also supported by the fact that banks will again receive interest rates of 0.75 percent after the abolition of penalty interest in July if they park funds at the ECB. On the other hand, real estate loans, for example, are likely to become more expensive.
After much hesitation, the Governing Council of the ECB raised interest rates in the euro area for the first time in eleven years at its meeting on July 21. At the September meeting, the central bank had announced a further interest rate hike of 0.5 percentage points.
But because the rate of inflation has continued to rise recently, the pressure on the euro currency watchdogs to decide on a larger step has increased. Higher interest rates can counteract rising inflation rates, but at the same time they are ballast for the already weakening economy.
“The ECB is now afraid that their skins will swim away and they will run into a year-long inflation problem,” commented Dekabank chief economist Ulrich Kater. His colleague from DZ Bank, Michael Holstein, thinks that the sharp rise in interest rates comes too late, because the euro economy is already on the way to recession – “but waiting longer would be even more expensive than taking courageous countermeasures in economically uncertain times “.
Ifo President Clemens Fuest commented: “Better late than never.” Nevertheless, monetary policy remains very expansive. “Further interest rate hikes will have to follow in the coming months. Interest rates are still very low.
The associations of private banks, cooperative banks and savings banks in Germany welcomed the historic rate hike. However, the decisions are “only one stage on the way to an appropriate level of interest rates,” said the President of the German Savings Banks and Giro Association (DSGV), Helmut Schleweis. “Further interest rate hikes must follow so that people can continue to believe in the ECB and its promise of stable prices.”
There is no end in sight to the price increases in the euro zone: In August, inflation in the currency zone of the 19 countries climbed to a record high of 9.1 percent, driven by rising energy and food prices. The ECB is now anticipating 8.1 percent inflation for 2022 as a whole. According to estimates by the central bank, the rate of inflation will remain well above the ECB’s target mark for the coming year at 5.5 percent.
In the medium term, the central bank is aiming for a stable price level with an annual inflation rate of two percent for the common currency area. For months, inflation has been driven primarily by rising energy and food prices, which rose sharply again after the Russian attack on Ukraine.
The ECB had long interpreted the high inflation as temporary and initiated the turnaround in interest rates much later than many other central banks. The US Federal Reserve, for example, has already raised its key interest rate several times, twice by 0.75 percentage points. Lagarde acknowledged that the ECB made mistakes in its assessments.
For more and more people, the high inflation is becoming an enormous burden, Bundesbank President Joachim Nagel recently said and warned of a “heavy interest rate hike” in September. Monetary policy must be resolute in combating high inflation, Nagel stressed.
At the same time, monetary authorities are concerned that the economy, which is already having to do with supply bottlenecks and the consequences of the Ukraine war, for example on the energy market, will be slowed down by normalizing the monetary policy, which had been ultra-loose for years, too quickly. There is great concern that the economy could plunge into recession.
Monetary means cannot “conjure up energy reserves, nor lower energy prices, nor shorten the duration of the energy crisis,” said Otmar Lang, chief economist at Targobank, despite his fundamental approval of the ECB’s course change.
The spokesman for the German Greens in the European Parliament, Rasmus Andresen, is critical of the ECB’s decisions: “Supply bottlenecks, Russia’s war of aggression and enormous excess profits on the part of companies cannot be resolved by the ECB’s interest rate policy.”
However, after a strong first six months in 2022 as a whole, the ECB now believes that the economy in the euro area will grow slightly more than assumed in June: the forecast now assumes an increase of 3.1 percent, in June the central bank still had 2.8 percent for 2022 percent growth expected.
“Following a recovery in economic growth in the euro area in the first half of 2022, the latest data point to a significant slowdown. Economic stagnation is expected for the remainder of the year and the first quarter of 2023,” the ECB said. According to the ECB estimate, the gross domestic product (GDP) in the currency area will not grow by 2.1 percent next year, but only by 0.9 percent./ben/als/DP/jsl