The ECB (European Central Bank) will raise key interest rates in the euro area by 0.25% from July

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The European Central Bank (ECB) will raise interest rates by 0.25% from July

Amsterdam, Netherlands
At its meeting on June 9, 2022 in Amsterdam, the European Central Bank (ECB) decided to increase its bond purchases from banks by 0.25 percentage points from July. It is the first increase since 2011, which was necessary because of the global financial crisis, the sovereign debt crisis in Greece and the corona pandemic. In addition, the central bank has been buying public bonds and corporate securities since 2015 in order to keep the economy solvent in times of crisis and to hold back inflation. However, high energy prices and inflation in the euro area of 8.1 percent are currently a challenge for everyone.
Consequences for the economy
With the key deposit rate remaining at minus 0.5 percent, commercial banks have to pay penalty interest if they park excess funds at the ECB. It is often mentioned to bank customers as a justification for negative interest rates.
On the other hand, higher interest rates make the euro more attractive for investors because it can boost its exchange rate and make imports of raw materials and energy cheaper. On the other hand, higher interest rates mean that loans are expensive, which dampens consumption and investment, and thus demand. A rise in interest rates will also make borrowing more expensive for the euro countries, which is likely to put a strain on the budgets of heavily indebted countries such as Greece and Italy in particular
No agreement on the interest rate in the ECB
Unfortunately, there is still no agreement between the ECB’s central bankers as to which interest it should target rate level. On the one hand, supporters of a tighter monetary policy are calling for larger interest rate hikes. On the other hand, supporters of a dovish monetary policy advocate a course of smaller steps due to the economic uncertainty. A large interest rate hike of a total of 0.5 percentage points currently expect on the financial markets for 2022.
Meanwhile, interest rates in the USA and Great Britain rose significantly to around 2.5 percent a few months ago. However, these are likely to be lower in the euro zone, with the level of the “natural” interest rate, a kind of inflation- and growth-neutral interest rate, being considered decisive.
Edited by Y. Maiga

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