ModernizationThe European Central Bank raised interest rates for the first time since 2011. Key interest rates at the central bank are raised by half a percentage point. With this move, which is larger than economists had expected, policy makers in Frankfurt want to counteract the rising inflation in the Eurozone. According to European Central Bank President Christine Lagarde, the economic outlook in the eurozone is bleak due to the ongoing war in Ukraine and inflation, which “will remain at an undesirably high level for some time to come.”
The French said the effects of armed conflict, with inflation at record levels and much uncertainty in the economy, are leading to bleak prospects for the second half of 2022 and beyond, after the European Central Bank decided to raise interest rates for the first time. Since 2011 trying to curb price hikes.
Energy prices have risen particularly sharply since the Russian invasion of Ukraine. As a result, the central bank had to intervene. Interest rates may rise further later this year, but the European Central Bank will not comment on the extent of future interest rate steps in today’s rate decision.
Interest rates have been lowered to historically low levels by the central bank over the years. The European Central Bank did this to boost the Eurozone economy.
When the European Central Bank raises interest rates, banks generally raise mortgage rates, for example. Many banks have already done so in recent months, as they expect the central bank to take this step. Borrowing is now more expensive, which is expected to result in people and businesses spending less money, causing demand in the economy to fall and prices to rise less quickly in the long run.
Interest rates have been lowered to historically low levels by the central bank over the years. The European Central Bank did this to boost the Eurozone economy. Even the so-called deposit rate has been below zero for a long time. This interest rate now goes to 0 percent. This means that banks no longer have to pay for the money they temporarily store in the European Central Bank.
transmission protection tool
Critics accuse the European Central Bank of raising interest rates too late. Eurozone inflation has risen to record levels in months. At the same time, the economic outlook deteriorated as a result of the war in Ukraine. In this environment, if the European Central Bank raises interest rates too quickly, it could become a burden, especially for heavily indebted countries in southern Europe.
To ensure that higher interest rates do not immediately cause problems for some countries, the European Central Bank is launching a new anti-crisis program, the so-called Transfer Protection Instrument (TPI). With targeted bond purchases, the TPI aims to prevent “unwanted” market volatility in weaker euro countries such as Italy, where interest rates on government debt can rise much faster than in stronger countries. This, combined with the risk of a euro crisis, would frustrate the goal of price stability across the eurozone.
We prefer not to use it, but if we want to, we can make great use of it.
Lagarde revealed that countries are eligible for such purchases if they do enough to put their budgets in order, with the central bank relying on analyzes from the European Commission and the International Monetary Fund, for example. At the same time, only the European Central Bank can decide whether or not to deploy the resource. “We’d rather not use it,” Lagarde said. But she also said, “If we want to, we can be very successful.”
Investors are not impressed
It seems that investors in the foreign exchange markets were not affected by the disclosure. The euro once again gave up its earlier gains against the dollar. The value of government bonds in Italy has fallen sharply, which, in addition to high government debt, is also in the middle of a political crisis.
Interest rates have not been adjusted since Christine Lagarde was appointed ECB President in November 2019. The last time interest rates were raised in the Eurozone was when France’s Jean-Claude Trichet was still the ECB president. His successor, Mario Draghi, has only implemented interest rate cuts since the end of 2011.
See also: The European Central Bank already announced in June to raise interest rates to combat high inflation
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