The European Central Bank (ECB) raises its interest rates by three-quarters of a percentage point for the second time in a row. This equals the central bank’s largest interest rate hike ever in the fight against sharply rising inflation in the eurozone.
The ECB also indicates that further rate hikes are likely to be needed to bring inflation back to normal levels.
Inflation is still far too high and will remain above the 2 percent target for an extended period, the interest rate decision statement said. Moreover, since the Russian invasion of Ukraine, life in the euro area has rapidly become more expensive. Energy prices, in particular, are skyrocketing.
The idea behind the interest rate hikes is that borrowing becomes more expensive. So people and companies will eventually spend less money. So, for example, policymakers at the ECB hope to slow down demand in the economy and ensure that prices don’t go up as much.
For years, interest rates in the eurozone were very low. As a result, people barely received any interest on their savings interest, but it also made a difference in the monthly mortgage payments. Then, in July, the ECB announced its first rate hike since 2011. That involved an interest rate step of half a percentage point. Subsequently, the ECB raised its interest rates by three quarters for the first time in September.
Due to the new interest rate decision, the so-called deposit rate, the interest banks pay on money they temporarily store at the ECB, will return to 1.5 percent. That is the highest level since 2009. Interest rates are likely to rise later, but policymakers will decide at the ECB in subsequent meetings. They want to look at the situation over and over again.