European Central Bank continues to raise interest rates, inflation not yet curbed

The European Central Bank has raised interest rates again. The central bank’s three main interest rates will be raised by 0.5 percentage point, bringing the important deposit rate to 2.5 percent.

It is the fifth interest rate increase in a row in the fight against inflation. The interest rate increase of half a percentage point now is the same as the previous one in December and confirms that interest rates will continue to rise, albeit at a slower pace.

The ECB also announced that the central bank intends to raise interest rates again by half a percentage point at its next policy meeting in March. After that, it will be evaluated how to proceed with the interest rate.

The idea behind the higher interest rate is to slow down the economy and reduce inflation. The idea is that borrowing money will become more expensive due to the higher interest rates and that will put a brake on investments. Consumers also spend less money. Although inflation in the eurozone has been declining in recent months, it stood at 8.5 percent in January, which is still far too high.

Furthermore, a start will be made in March on phasing out the immense government bond purchase program (APP), worth 3,250 billion euros, until the end of June 2023 by an average of 15 billion euros per month.

Together with the higher interest rates, the reduction in the purchase program represents a tightening and austerity of monetary policy. During the financial crisis and the corona crisis, the economy was supported by lower interest rates and large-scale aid purchases.

The higher interest rate will affect all kinds of interest rates, such as mortgage interest and savings interest. In anticipation of the ECB interest rate decision, some banks recently announced that savings rates will soon be raised again.

Mortgage interest rates have risen sharply since the beginning of last year, especially after the first rate hikes. With a mortgage with a term of 10 years, you must now count on 4 percent, compared to about 1.5 percent previously.