Dhe European Central Bank (ECB) is raising interest rates by 0.75 percentage points. The central bank announced this on Thursday after the September meeting of the ECB Council. In view of the sharp rise in inflation in the euro area, the monetary authorities are thus daring to take an unusually large interest rate step: it is after all the sharpest increase in the key interest rate since the introduction of euro cash 20 years ago. However, it is following America’s central bank, the Federal Reserve, which has already raised interest rates by this magnitude twice.
Until the very end, economists and analysts had been puzzling over the past few days as to whether it would be 0.5 or 0.75 percentage points – individual ECB observers had also expected only 0.25 percentage points.
Fight against the highest inflation in the history of monetary union
The main refinancing rate, the actual base rate of the central bank, will rise from 0.5 to 1.25 percent. This is the ECB’s second interest rate hike in a long time: In July, the monetary watchdogs raised interest rates for the first time in eleven years. Nevertheless, inflation continued to rise in August to its highest level since the founding of the European Monetary Union – and is unlikely to have peaked yet. Many economists expect it to exceed the 10 percent mark in the fall. Gas prices in particular are likely to continue to drive up the cost of living.
In some euro countries, inflation is now 20 percent or more. Estonia is at the top with 25.2 percent. The inflation rate is now in double digits in many euro countries, for example in Spain at 10.3 percent and the Netherlands at 13.6 percent. Germany is still more in the middle: According to the national calculation method, the German inflation rate was 7.9 percent in August, according to the European calculation method of the Harmonized Index of Consumer Prices (HICP), it has already reached 8.8 percent.
Savers in Germany are now also benefiting from the turnaround in interest rates: even if the savings interest on most accounts is still meager, at least the negative interest on savings has been abolished at many institutions. ING Germany was one of the pioneers in this step, but Deutsche Bank, for example, which originally wanted to let its negative interest rates expire in October, did so in August.
At its June meeting, the ECB actually held out the prospect of raising interest rates by 0.25 percentage points in July and that a “larger” rate hike would follow in September, which at the time was interpreted as a 0.5 percentage point hike . But then inflation rose steadily and the central bankers decided in July, contrary to their own announcements, to increase interest rates by 0.5 percentage points. After that, it was said that decisions should now be made from session to session based on data. That was considered a new approach.
The Governing Council had recently fought
Until recently, the financial markets had considered a 0.5 percentage point interest rate hike in September to be the most likely scenario. After all, there was concern that the ECB could raise interest rates “into the recession”, as ING economist Carsten Breszki put it – and thus look a bit unhappy.
ECB President Christine Lagarde had recently been very reluctant to make any statements about further interest rate developments. But other currency watchdogs have pushed ahead. A group of “hawks”, ie supporters of a tighter monetary policy in the Governing Council, had whispered that there should be no “ban on thinking” and brought 0.75 percentage points into play.
In any case, Bundesbank President Joachim Nagel called for a sharp increase in interest rates after the new inflation figures for the euro area became known. ECB Executive Board member Isabel Schnabel argued in a widely acclaimed speech at the central bank meeting in Jackson Hole, USA, that the ECB must “act vigorously” in order to “quickly bring inflation back to the target level”. However, ECB chief economist Philip Lane warned against taking steps that were too big and advocated a steady pace that should be neither too slow nor too fast.
Most observers are now not counting on this being the last ECB rate hike. According to Deutsche Bank Research, the financial markets are expecting two further increases of 0.5 percentage points each in October and December by the end of the year. At the end of the year, the actual base rate would then be 2.25 percent. Jörg Krämer, the chief economist at Commerzbank, had even taken the view that a base rate of 4 percent would actually be appropriate to combat high inflation.
