In an attempt to further reduce inflation, the European Central Bank (ECB) is raising interest rates again. As of September 20, the ECB will set the interest rate at 4 percent. Never before have bank interest rates been so high.
The increase is the tenth since the ECB raised the negative interest rate from -0.5 percent to 0 percent in July last year. When the central bank raised interest rates to 3.75 percent in early August, President Christine Lagarde warned that a new step would follow if inflation remained too high.
The ECB writes that price increases are becoming less pronounced, but are still too high. “Inflation continues to decline, but is expected to remain too high for too long,” the ECB wrote. The target of 2 percent inflation is still out of reach.
As long as necessary
In an explanation, Lagarde emphasized that the ECB is “committed” to bringing inflation back to 2 percent in a gradual manner. “That is why interest rates will remain high for as long as necessary,” she said, referring to her predecessor Mario Draghi’s “whatever it takes” statement during the credit crisis. Lagarde said she used “strong words.”
Just like after the previous interest rate decision, Lagarde stated that European member states must reduce their debts and stop supporting companies. “Otherwise, an even stronger monetary decision will follow.” According to her, the support and government debts would keep inflation unnecessarily high.
Lagarde acknowledged that there is discussion within the ECB about interest rates. Some think it is enough, while others are in favor of increases. She said that yesterday there were discussions all morning and afternoon. “Not everyone reached the same conclusion. There were members who wanted to pause to consider the impact of the previous decisions. But there was a solid majority in favor of raising rates again.”
Peak reached
Although Lagarde did not comment on whether there will be more interest rate increases, ING chief economist Carsten Brzeski thinks that the peak has now been reached. He calls a scenario in which inflation unexpectedly rises extremely high again “highly unlikely”.
“For now, the ECB is determined to keep interest rates at current levels, pending the rate hikes taking effect in the economy,” Brzeski said. “The next discussion will be about how long these new rates will be sustained. Even if the door to further increases remains open, today’s hike will be remembered as the ECB’s final step in the most aggressive rate cycle in history.”
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