The European Central Bank (ECB) on Thursday confirmed its fight against inflation by announcing the largest increase in euro zone interest rates in its almost 24-year history.
The ECB has raised the price of money by three-quarters of a point, to 1,25%, in order to curb the rise in prices that has already reached 9,1%, despite the obvious signs of recession currently existing in the Eurozone. This percentage is closer to that recorded in the United Kingdom (1,75%) and the United States (2,25%).
Christine Lagarde's body has also announced new increases for the next meetings in order to deal with the risk of a sharp rise in "the inflation outlook." The ECB has also explained that "they want to ensure that inflation returns to the 2% target in the euro zone in the medium term."
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This decision was taken to combat inflation, as the spring forecasts are not being met, due to the fact that both the war in Ukraine and the energy crisis are making it difficult for prices to fall in Europe.
In just two months and with two key moves, the ECB has put eight years of negative interest rates and broad monetary expansion behind it, returning interest rates to levels similar to those of 2011.
In making this decision, the ECB has relied on different perspectives from its economists, who predict that average inflation this year could reach 8,1%, compared to the 6,8% estimated in June. For 2023, they believe this will be 5,5% and for 2024, 2,1%.
The European Central Bank has also admitted that the consequences of the war in Ukraine are leading to a stagnation of the economy for the last months of the year and for the first quarter of 2023. For this coming year, the ECB has gone from estimating a growth of 2,1% to considering a growth of 0,9%. On the other hand, the depreciation of the euro against the dollar is another of the keys that has led to this decision.
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In this way, the rise in interest rates has a direct consequence for the macroeconomy, as economic activity is reduced due to the higher cost of loans, which in theory would lead to an alleviation of inflation. On the other hand, it also has a strong consequence for bank customers because if it becomes more expensive for entities to obtain financing, they will transfer the cost to the loans they grant to their clients and to mortgage loans.
This will make mortgages more expensive for people who buy a house now and for those who already have a variable-rate mortgage, which could translate into a cooling of consumption and investment due to the fear of companies and citizens of getting into debt because it is more expensive than before, one of the main concerns that the ECB is considering with the rise in interest rates.
