European Central BankThe European Central Bank (ECB) has raised interest rates in the eurozone by the previously announced half percentage point. This means that policymakers in Frankfurt have not been fazed by the turmoil in the banking sector over the past few days.
According to the ECB, the interest rate increase is necessary to bring the high inflation under control. Inflation is high because there is more demand for goods than supply. And that leads to higher prices.
A higher interest rate makes borrowing more expensive and saving more attractive. Companies will then borrow less to invest. Consumers will also buy less on credit. This causes the demand for products to decrease. And less demand leads to lower prices. People and companies will eventually spend less money. In this way, the ECB hopes to curb demand in the economy and to ensure that prices do not rise so fast.
In the United States, however, the Silicon Valley Bank (SVB) and the Signature Bank collapsed last week. Those banks had run into problems, among other things, because interest rates in the US have risen sharply recently. On Wednesday, there was a lot of panic on the European stock markets about the financial situation of the Swiss Credit Suisse, which led to fear that the American troubles would blow over to Europe.
What do purchasing power, inflation and average income mean again? Read it in our economics glossary.
tumult
Investors therefore eagerly awaited the ECB’s response to this turmoil. Some experts speculated that the ECB might decide on a smaller rate hike of a quarter of a percentage point. But other experts thought that deviating from the previously laid out path would only cause more unrest in the financial markets.
Due to the new interest rate decision, the so-called deposit rate, the interest that banks pay on money that they temporarily store at the ECB, will return to 3 percent. That is the highest level since 2008. Consumers will notice the higher interest rate when taking out a mortgage, among other things. Due to the higher interest rates of the ECB, banks such as ING and ABN Amro can also slowly raise their savings rates again.
Shock resistant
In a statement, the central bank says it is closely monitoring the current tensions in the market. The ECB also says it is ready to intervene if necessary, but that would not be necessary for the time being. The banking sector in the euro area is resilient to shocks.
But the central bank is not making any new predictions about a possible next interest rate hike at the next decision point. According to the ECB, the tensions in the market are creating additional uncertainty when it comes to forecasting inflation and economic growth. The ECB did say that longer-term inflation remains too high.
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