With the sixth interest rate increase in a row, the euro currency guardians are bracing themselves against the persistently high inflation in the common currency area. The European Central Bank (ECB) is raising the key interest rate again by 0.50 percentage points to 3.5 percent. This was decided by the central bank council on Thursday in Frankfurt.
Many economists had expected that the ECB would stick to the prospect of a sharp increase in interest rates, despite the uncertainty in the banking sector after the collapse of several smaller US banks and concerns about the major Swiss bank Credit Suisse. The ECB stressed: “The euro area banking sector is resilient: capital and liquidity positions are sound.”
Interest also creates pressure
The central bank is aiming for price stability in the euro area in the medium term with an inflation rate of two percent. This target has been a long way off for months. Although inflation has generally weakened over the past few months, it has only been slow of late. In February, the inflation rate in the common currency area was 8.5 percent, according to an estimate by the European statistics agency Eurostat, after 8.6 percent in January. Above all, high energy and food prices are fueling inflation.
Higher inflation rates reduce the purchasing power of consumers, they can afford less for one euro. Rising interest rates can counteract high inflation rates because loans become more expensive and this slows down demand. However, sharply rising interest rates can put banks under pressure, as was recently shown by the collapse of the Silicon Valley Bank (SVB) in the USA.
Optimistic finance minister
Experts currently believe that a global financial crisis like the one that followed the collapse of Lehman Brothers around 15 years ago is unlikely. Federal Minister of Finance Christian Lindner emphasized that the German credit system – private banks, savings banks, cooperative institutes – is stable. “And we will continue to ensure that,” he said on Wednesday evening on the ARD program “Maischberger”.
The so-called deposit rate, which credit institutions receive when they park money with the ECB, rises to 3.00 percent after the ECB Council’s decision on Thursday. Since the ECB changed course in July, savers have benefited from rising interest rates for overnight and time deposits. However, high inflation is reducing returns.