In the euro area, consumer prices in May were more than eight percent higher than in the same month last year. In Austria, too, inflation is at the same level, at eight percent it is the highest it has been in almost 50 years.
The ECB, under its boss Christine Lagarde, hesitated for a long time to take countermeasures, which drew a lot of criticism. Other central banks such as the Federal Reserve in the USA and the Bank of England have already raised their key interest rates several times. The central bank finally reacted on Thursday: In July, the key interest rate in the euro area will rise by 25 basis points each time, until then it will remain at zero percent.
At the same time, the Governing Council of the ECB decided at its external meeting in Amsterdam to end the net bond purchases worth billions as of July 1st. The ECB had previously defined the end of these purchases as a prerequisite for an interest rate hike. It expects an average rate of inflation of 6.8 percent for the current year, according to the ECB on Thursday. In March, 5.1 percent were estimated. The ECB also corrected its original forecasts for economic growth. Instead of 3.7 percent, she expects only 2.8 percent for this year.
Pros and cons of loose politics
Lagarde announced further possible steps in the fall, and ahead of the ECB meeting, experts were expecting a series of interest rate hikes in the current year. In the medium term, the ECB is aiming for two percent inflation as the ideal value for the economy. From their point of view, this level holds the most advantages for the euro zone.
For months, inflation has been driven primarily by rising energy prices, which rose sharply once more as a result of the Russian attack on Ukraine. The ECB continued to flood the markets with new money following the war began. The currency watchdogs had long maintained their assessment that the rising inflation was being driven by special factors and was therefore temporary. The flood of money should also make it possible for some European countries to refinance their high debts and cushion the consequences of the pandemic.
Consequences for borrowers and savers
This has hurt consumers elsewhere, who are getting less for their money than they were just a short time ago. The ECB is now trying to walk a tightrope between high inflation and increased risks to economic recovery. Borrowers are likely to feel this now.
Interest rate hikes increase the cost of borrowing, thereby curbing demand. Higher interest rates hit those who need a new loan or follow-up financing for a real estate loan in particular. In the case of current mortgage loans, the interest rate does not change. For the state, in turn, it will be more expensive to borrow money.
There will also be changes for savers as a result of the move by the ECB. An end to negative interest rates on current accounts is in sight when the central bank raises the negative deposit rate. Currently, banks have to pay 0.5 percent interest when parking money with the ECB. Many institutes pass this charge on to private customers as a “custody fee” from a certain sum on the account.
Some banks have already announced an end to their custody fees as soon as this penalty interest on bank deposits is removed. However, it will probably be a while before savers can once once more start earning significant interest on their savings.
