For the fourth time in a short time, the European Central Bank (ECB) is raising the interest rate. This is an increase of 0.5 percentage point, bringing the interest rate to 2%. The European banking supervisor announced it on Thursday.
The central bank also announced that new hikes could come next year. The ECB will determine the magnitude of these interest rate changes only at a later stage. The steps depend on how the prices of products and services develop.
The ECB aims to raise those prices by around 2% a year, but it’s currently going much faster. For example, households in euro countries paid on average 10% more for their daily life last month than a year earlier. Groceries and energy, among other things, have risen sharply in price over the past year, causing problems for many people.
“Inflation is still too high and is expected to remain above target for too long,” the central bank said in a statement. The ECB expects inflation for the full year to be 8.4% and for next year 6.3%.
Higher interest rates for savers
Due to the ECB’s interest rate decision, regular banks such as ABN AMRO and ING receive more interest if they deposit money with the central bank. The regulator hopes that banks will also raise interest rates for their customers, such as savers. That makes saving more attractive, so consumers buy less, is the idea. If there is less demand for products, prices go down.
The ECB is not the only central bank to raise interest rates. Last Thursday, the Bank of England did the same, while the Fed in the US also raised interest rates.
At the same time as raising interest rates, the ECB announced that it would begin phasing out bonds that the central bank has bought in recent years from next year. The ECB bought around €5 trillion worth of bonds from various member states. This was supposed to stimulate the European economy. Now that the ECB no longer deems it necessary, the bank wants to slowly get rid of it.
The central bank wants to do this by gradually reducing its portfolio. The ECB will launch it in March next year, making increments of 15 billion euros a month. At the end of the second quarter, the ECB will reassess the rate at which the central bank will further reduce its bond holdings.
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