An unprecedented case. How the ECB Raised Rates

The European Central Bank raised interest rates by 0.75 percentage points at the same time. This is because of the war Russia unleashed against Ukraine.

The Board of Governors of the European Central Bank unanimously raised the key rate by 75 basis points simultaneously, to 1.25 percent per annum. This is an unprecedented increase since the introduction of the euro. The regulator has announced several more rounds of rate hikes in upcoming meetings. This is done to compensate for inflation, which accelerated in the euro area in August to record highs due to Russia’s war against Ukraine and the subsequent energy crisis. Correspondent.net telling the details.

“A necessary but far from sufficient step”

The European Central Bank on Thursday raised the base rate by 75 basis points to 1.25 percent per annum, following from a statement published on the regulator’s website.

“This important step will accelerate the transition from the existing accommodative rate level to levels that will ensure a timely return of inflation to the ECB’s medium-term target of two percent,” the statement read.

The base interest rate on loans increased to 1.25 percent, the rate on deposits – up to 0.75 percent, the rate on margin loans – up to 1.5 percent. The regulator has announced its intention to continue raising rates in the next few meetings.

On July 21, the ECB raised the key rate to 0.5 percent, ending an 11-year period of zero and negative rates. The regulator then said that at the next meetings of the Board of Governors “further normalization of interest rates will be appropriate.”

These measures are being taken as part of the fight against inflation. Consumer inflation in the 19 eurozone countries in August was a record for the entire existence of the single European currency since January 1, 1999, following data published by Eurostat on August 31.

The increase in prices is assessed as “above” the targets, it is stated that it has the possibility to remain at the current levels for a “long period”.

According to Eurostat’s first assessment, inflation in the euro area reached 9.1 percent in August, with rising energy and food prices accelerating inflation, which reached record levels of 38.3 percent and 10.6 percent, respectively. respectively.

This factor, as well as excess demand “in some sectors”, caused by the need to restart the economy after the covid restrictions, as well as supply restrictions, maintain upward pressure on inflation – the ECB admits that the current records are not limited, but expects a decrease in the indicator as measures to broadcast monetary policy in the economies of the countries of the euro area.

“Market indicators show that even if oil prices continue to fall in the short term, gas prices will remain at unusual levels,” said ECB President Christine Lagarde.

Speaking about the most pessimistic scenario of the forecast, Lagarde said that it was calculated in the condition of a complete stoppage of Russian gas supplies to Europe and the prolongation of Russia’s war against Ukraine and would result in a 0.9 percent decline in Eurozone GDP in 2023.

German newspaper Handelsblatt welcomes the ECB’s decision but criticizes it for being too late.

“This is a necessary, but far from sufficient step, which aims, first, to prevent inflation, and second, to restore the confidence that has been lost. In the end, it is a step to limit [причиненного самим регулятором] damage – no more, but no less. We are specifically talking about damage limitation, because the ECB has underestimated the dynamics of inflation for a very long time.

Lagarde was criticized for taking too long to reassure Europeans with words about a “temporary phenomenon.” “And it borders on a refusal to face the truth. Lagarde has openly admitted these mistakes – and here it is worth giving her credit,” the author wrote.

The Spanish newspaper El Mundo was even harsher in its assessment: “The regulator gave in to the emergence of signs that inflation was getting out of control – and before that it provided affordable credit and cheap money within a entire decade.”

“The need to cool the economy has become urgent – even at the cost of a recession in Europe … The ECB can be blamed for having enough opportunities to gradually raise interest rates in good year, but not – and now it finds itself forced to take an unprecedented step, because households and companies have become extremely vulnerable: they now face more expensive mortgages and loans,” wrote by the author.

The French newspaper L’Opinion writes that money is no longer “magical, but truly tragic – by virtue of its value.”

“And this involves dangerous consequences: an increasing part of the budget is spent on paying the public debt; the welfare state is paralyzed because reforms are not carried out; living standards are falling, because the economy is hardly growing … As the war literally continues beyond the threshold, today “Perhaps it is not appropriate to say that we live in a different, changed world. And yet. stars.

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