All three key interest rates will rise. The deposit rate doubles to 1.5 percent. At the same time, the central bank begins to withdraw the support it has given to banks.
14:37•Updated 15:57
The European Central Bank announced on Thursday that it will raise all three key interest rates. For example, the deposit rate doubles to 1.5 percent. In September, the interest rate rose from zero to 0.75 percent.
It means that there is also more upward pressure on mortgage interest rates, for example. Raising interest rates makes money more expensive for both consumers and companies. This is how it tries to curb the exceptionally fast rise in consumer prices, i.e. inflation.
Inflation already jumped at a speed of 9.9 percent in September. The central bank’s goal is two percent inflation in the medium term.
ECB says in the announcement (you will switch to another service) also that they intend to continue raising interest rates. It “monitors the inflation and economic outlook on a meeting-by-meeting basis.”
– The rapid rise in energy and food prices, supply shortages and demand recovering after the pandemic have increased price pressure and accelerated inflation in recent months, the bank explains.
The Central Bank’s highest decision-making body, the Council, meets every six weeks. The next time interest rates will be returned in December.
Director general Christine Lagarde the press conference starts at 15:45. You can watch it live at the link above. We will also update this article during the event.
More on the subject: Political leaders are under increasing pressure on the central bank, what will the ECB do today? Finland’s Marin, France’s Macron and Italy’s Meloni as critical
The ECB also said on Thursday that it will reduce the support it gives to banks. The central bank has given commercial banks more than two thousand billion euros in very cheap loans in recent years.
Banks have received loans from the central bank at zero or even negative interest. In practice, they have thus deposited the central bank’s money and received a risk-free return from it.
In the future, banks will have to pay interest on their deposits. The ECB will provide more details about its decision regarding banks in a press release later today.
“Inflation is worse than recession”
The chief economist of the employment pension company Elo Tiina Helenius and Chief Economist of Danske Bank Pasi Kuoppamäki commenting on monetary policy on Radio Suomen Päivä on Thursday.
According to them, the central banks have now strongly communicated that the most important thing for them is to get inflation expectations under control. But will the interest rate hike help curb inflation?
– I think it will help, but I don’t think it will stop here. I believe that monetary policy will be tightened even after this interest rate hike, says Helenius.
According to him, expectations about future inflation have not yet “shockingly run away”, but they have strengthened.
– This is the focus and theirs [keskuspankkien] primary goal. If it means that in the short term we have to sacrifice economic growth, then I believe that we are ready for this.
Helenius thinks that the ECB calculates that even though interest rate hikes can hasten a recession, tightening monetary policy is a lesser evil.
A dangerous spiral threatens
– It is better than the fact that we get into a price-wage spiral, where taming inflation requires a really drastic tightening, which can lead the economy into a serious recession.
The danger is that salary increase demands will become more common. By “spiral” Helenius means the spiral that can arise from rising wages. Companies transfer higher wages to prices, which in turn accelerates inflation.
The ECB cannot influence the price of energy by raising interest rates, because it is a consequence of Russia’s war of aggression: there is not enough energy available, so its price rises. However, there are other ways in Europe, Kuoppamäki estimates.
– We must be able to increase energy self-sufficiency, and the production of renewable energy, so that we can bring the price of energy down with other means, says Kuoppamäki.
The European Central Bank has generously supported the debts of governments and companies since 2014.
At the beginning of the corona pandemic, bond purchases were accelerated. The ball above describes how quickly the bonds sold to the central bank have increased its balance sheet.
Over the years, the ECB’s balance sheet has quadrupled to 8.8 thousand billion euros. Just eight years ago, the balance was 2.2 thousand billion. In practice, that is how much the eurozone has been in debt during the same period.
At least the ECB is not giving up on asset purchases yet. For example, the ECB plans to reinvest the securities it bought as pandemic support when they mature for at least two more years.
You can discuss the topic on 28.10. until 11 p.m.
More on the topic:
The ECB raised its key interest rate to a record high, the assessment of the economic outlook darkened – This is how the Governor justifies decisions
Bank of Finland’s Olli Rehn: The EU must get its ranks in order in the energy crisis – the spiral of inflation would lead to brutal unemployment figures
Forecast of the Ministry of Finance: economic growth will slow down to 0.5% next year, the threat of a recession cannot be ruled out