The ECB continues to raise interest rates


The key interest rate in the euro zone rises to 3.0 percent. The Governing Council of the European Central Bank (ECB) resolved a further increase of 0.50 percentage points, thus continuing its current interest rate policy.

ECB President Christine Lagarde explains the monetary authorities' decision.

With the fifth interest rate hike in a row, the euro monetary authorities are bracing themselves against the persistently high inflation. The European Central Bank (ECB) is again raising the key interest rate in the euro area by half a percentage point to three percent. This was decided by the central bank council on Thursday in Frankfurt. Another rate hike is already on the cards for the next monetary policy meeting on March 16. “We expect them to rise further,” said ECB President Christine Lagarde in Frankfurt. In March it will go up again by half a percentage point. The situation will then be reassessed, depending on the economic and inflation data.

Lagarde had already outlined this course in December: “We have to go a long way.” In January, Lagarde reaffirmed the determination of the central bank: According to the French, interest rates “must rise significantly and steadily” in order to contain inflation sufficiently.

Headquarters of the European Central Bank (ECB) in Frankfurt am Main in the evening sky

Core inflation, which excludes fluctuating prices for energy, food, alcohol and tobacco, recently remained at 5.2 percent. The ECB is concerned that high inflation could become entrenched and long-term inflation expectations could get off track.

The search for inflation balance

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 weakened again in January, consumer prices in the currency area were nevertheless  According to an initial estimate by the statistics authority Eurostat, this is 8.5 percent above the level of the same month last year. In Germany, the inflation rate was 8.6 percent in December. Above all, high energy and food prices are fueling inflation.

Bundesbank President Joachim Nagel warned in a recent interview: “One must be careful not to sing the farewell to high inflation too soon.” Despite the decline, inflation is still “much too high,” said Nagel, emphasizing: “Interest rates must continue to rise.” He would not be “surprised” if the ECB “further increased key interest rates” after the two steps announced for February and March, said the Bundesbank President, who has a say in monetary policy in the ECB Council.

Bundesbank President Joachim Nagel demands: “Interest rates must continue to rise.”

“Increasing the key interest rate by 50 basis points is correct, further steps of this magnitude must follow,” commented Jörg Asmussen, General Manager of the German Insurance Association (GDV), on the interest rate decision. The work is not finished yet. “The burgeoning economic optimism and the recently improved economic data make it easier for the ECB to stay on course.” The ECB might even be able to achieve a soft landing in this way. “The ECB is increasingly liking the interest rate screw,” said Alexander Krüger, chief economist at Hauck Aufhäuser Lampe Privatbank. With the interest rate hike, they are knocking on the interest rate area that is restrictive of the economy.

Good for savers

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. At the same time, however, higher interest rates can dampen economic development in the currency area, which now has 20 countries and which has been struggling with the consequences of the Ukraine war and a massive increase in energy prices for months.

The so-called deposit rate, which banks receive, if they park money at the ECB, rises to 2.50 percent after Thursday's ECB Governing Council decision. 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.

Return to normalcy in Washington

The US Federal Reserve had previously decided to raise interest rates. But with US inflation slowing, the Federal Reserve is taking it a little slower with the first rate hike of the new year. It raised the key rate by just a quarter of a percentage point on Wednesday – to the new range of 4.50 to 4.75 percent. This is the highest level of interest rates since November 2007.

After a series of recent relatively aggressive interest rate hikes, some normalcy is returning to US monetary policy. In December, the Fed only raised the key interest rate by half a point. Previously, it had pushed it up by 0.75 percentage points four times in a row in order to break the wave of inflation.

Fed Vice Chair Lael Brainard recently emphasized that although inflation has weakened recently, it is still there high. Therefore, monetary policy must remain sufficiently tight for some time to ensure that the Fed's target of an inflation rate of two percent can be achieved in the long term.

The interest rate screw was also turned here: Bank of England in London

Many risks in London

The interest rate move in London was clearer. The British central bank is continuing its fight against high inflation and has raised its key interest rate by a further 0.5 percentage points to 4.0 percent, the Bank of England announced on Thursday in London after its interest rate meeting. It is the tenth rate hike since the end of 2021.

However, the monetary authorities are more cautious about the future. The previous signal that forceful action would be taken against high inflation was weakened. It is now said that further rate hikes are warranted as more persistent inflationary pressures are identified. This could be taken as an indication of a slower pace of tightening or even a pause in interest rates. The Monetary Policy Committee still does not speak with one voice. Of the new members, two opposed the current rate hike.

The UK economy is particularly vulnerable at the moment. In addition to the Ukraine war, these include the economic consequences and high inflation, as well as the ongoing problems resulting from Brexit and the violent waves of strikes that are sweeping the country. The International Monetary Fund (IMF) assessed the economic prospects for Great Britain less favorably than for many other large industrialized nations this week.

dk/(hb (rtr, dpa, afp)