ECB will likely ‘adjust’ key interest rate to tame the inflation

7

The European Central Bank (ECB) will meet in Amsterdam on Wednesday and Thursday. Interest rate policy is high on the agenda. Many analysts, but certainly also consumers, hope that the regulator will finally come up with an interest rate increase. Is it really coming? And why is this so important?

This is the ECB’s deposit rate. That is the interest rate that banks, for example Rabobank or ING, receive if they want to deposit money with the ECB for a short time. By the way, ‘get’ is not the right word, because since 2014 that interest rate has been negative. Since september 2019, it has been a rate of -0.5 percent. This means that banks have to pay interest if they want to deposit money with the ECB.

Because it also determines which interest rates the banks themselves apply to their customers. For example, the interest you get on your savings. For example, Dutch people who have more than 100,000 euros in savings have had to pay money for it at most banks for some time. Interest rate policy can also have an impact on the sky-high inflation, which we have been dealing with for months. More on that later.

Are interest rates really going up?

That is not certain, but many analysts expect the ECB to announce on Thursday that they will adjust their deposit rate. Presumably, this is a small step, whereby the current rate changes from -0.5 percent to -0.25 percent.

That increase will probably not take effect immediately, but only next month. In september, a new increase of also 0.25 percent could be added. For the first time in eight years, there will be no negative interest rates.

If the ECB raises interest rates, Why do they do it?

The main reason is the aforementioned inflation. Prices for products and services have been rising for a long time. This started in the autumn, when gas prices suddenly skyrocketed. The price of oil, and therefore of gasoline and diesel, also went up considerably. And because you need energy to make and transport a lot of goods, the prices of those goods also went up.

For example, inflation in the Netherlands was 10.2 percent last month. In the two months before, inflation also fluctuated around that percentage, while prices elsewhere in Europe were also rising sharply. Prolonged high inflation is detrimental to the economy and can put many households in financial trouble.

The ECB can do something about this by raising interest rates. As mentioned earlier, this causes banks to increase interest rates on savings. Consumers will save more and spend less, that’s the idea. As a result, there is less demand for goods and services and this often means that prices fall, or at least rise less sharply.

LEAVE A REPLY

Please enter your comment!
Please enter your name here