ECB raises interest rates for the first time in eleven years – by 0.5 percentage points

DMany savers have been waiting for this for a long time: the European Central Bank has decided to raise interest rates for the first time in eleven years. The Governing Council announced this on Thursday after its monetary policy meeting. Key interest rates in the euro zone are set to rise by 0.5 percentage points. It is also a turning point in the history of the European Monetary Union: after many years of low interest rates, the central bank is taking a step towards normalizing its monetary policy. At the end of June, she had let the net bond purchases of her crisis program expire. The ECB is late with this: numerous other central banks in the world, including the American Federal Reserve and the Swiss National Bank, have long since braced themselves against inflation by raising interest rates.

The previous time there was a rate hike in the euro area was under the previous predecessor of today’s ECB President Christine Lagarde. Under Jean-Claude Trichet, key interest rates rose on July 7, 2011 – a step that was withdrawn soon afterwards. In the eight-year tenure of the ECB President who followed, Mario Draghi, there had been no rate hike at all, just as there had been in Lagarde’s previous tenure since 2019.

Larger rate hike than many expected

The first hike in interest rates in the euro area is even larger than many had expected. In a survey of 63 economists by the Reuters news agency, 62 had expected an initial rate hike of just 0.25 percentage points. In view of more than 8 percent inflation in the euro area, however, many economists had at the same time actually described a significant increase in key interest rates as very urgent. After all, the ECB is targeting inflation of 2 percent. In June, the inflation rate in the euro zone, unlike in Germany, continued to rise to a new record of 8.6 percent. There had recently been signals from the Governing Council of the ECB that a possible stronger interest rate hike of 0.5 percentage points was also being discussed.

In addition to numerous bank representatives, the President of the Munich Ifo Institute, Clemens Fuest, recently urged the ECB to take such stronger countermeasures against the ever-increasing inflation. In the first euro countries such as Estonia and Lithuania, inflation finally reached 20 percent and more; in a larger number of countries such as Spain and Greece, the inflation rate is already in the double digits. In Germany it was 8.2 percent according to the European calculation method.

Negative interest rates will be abolished

The ECB is doing away with its negative interest rates. As a result, many banks where the custody fee for customers is directly linked to this ECB interest rate should also eliminate their negative interest rates. Other institutes – the Internet portal Verivox counted 51 – even abolished their custody fees in anticipation of the ECB decision or made them irrelevant for most savers through high exemption amounts; one of the most prominent examples was ING Germany as of July 1st.

In any case, many banks had already raised interest rates before the central bank. In particular, building interest rates had risen from 0.8 to more than 3 percent for building loans with a ten-year fixed interest rate since the beginning of the year. However, some banks had also increased interest rates for overnight and time deposits from a low level – but these will remain far below the inflation rate for the time being, so that savers will continue to lose money in real terms, i.e. after deducting inflation. Interest rates of more than 2 percent can only be achieved with fixed-term deposits at lesser-known banks and with long maturities.

A new tool to fight the crisis

Most recently, the ECB was concerned that the first interest rate hikes could send yields on government bonds in highly indebted euro countries skyrocketing, leading to a fragmentation of the euro area. But that would prevent the “transmission”, the implementation of its monetary policy in all euro countries, the ECB argues. In order to be able to do something about this, the central bank has prepared a new monetary policy instrument. It should be able to use it to buy bonds from individual euro countries if their yields rise too quickly for speculative reasons or deviate too much from the yield on federal bonds.

Recently, the government crisis in Italy in particular has been followed nervously by the financial markets. At times, Italian yields have already risen in this context. Previously, the announcement of the first ECB rate hike in June had caused yields to rise noticeably. The central bank was so worried that ECB President Lagarde spontaneously called an emergency meeting of the ECB Council – and announced that work on the new monetary policy instrument would be accelerated. This week, the Governing Council of the ECB said that at the meeting for the first rate hike, everyone will certainly have the situation in Italy in the back of their minds.