After much thought, the ECB has increased interest rates by 50 basis points to curb high and sustainable inflation.
The European Central Bank (ECB) newly increased interest rates by another half percentage point after today’s meeting in Frankfurt.
The ECB’s latest rate hike comes amid financial troubles in the US and European banking sectors, with stocks taking a hit. However, the banking arm of the Eurosystem considered it necessary to increase by a Press release the present day. The publication on monetary policy decisions said:
“Inflation is projected to stay too high for too long. This is why the Governing Council decided today to raise the three key ECB interest rates by 50 basis points, in line with its determination to ensure a timely return of inflation to the 2% medium-term target.
ECB President Christine Lagarde seeks to explain the main bank’s decision on the latest interest rate hike at a press conference later today. However, the already published ECB press release attempted to shed some light on the fiscal development, noting:
“The high level of uncertainty reinforces the importance of a data-driven approach to the Governing Council’s rate policy decisions, which will be determined by its assessment of the inflation outlook in light of incoming economic and financial data, the dynamics of subjacent inflation, and the strength of the transmission of monetary policy”.
Furthermore, the Governing Council of the ECB is also closely monitoring the current market tensions in order to respond as necessary. The Council stated that its ultimate objective is to preserve price stability and financial stability within the euro area.
The latest rise in interest rates places the basic interest rate in the euro area at 3%.
ECB interest rate hike comes amid market downturn
The ECB had indicated for several weeks that it could raise interest rates again at their March meeting. This decision was intensified as inflation across the region remained well above target levels, essentially crippling the area’s banking sector. On Wednesday, the entire euro banking sector ended the session down 7%, which also saw shares of Credit Suisse fall. Shares of the Swiss financial powerhouse tumbled as much as 30% during the intraday trading session on Wednesday.
As a result, Dan O’Brien, chief economist at the Institute of European and International Affairs, concluded that another rate hike was inevitable. In a press conference, O’Brien explained that the ECB had already indicated its intention to raise rates. Therefore, not doing so could send fear into the financial nerve of the eurozone, which he does not want to suggest. However, O’Brien previously predicted a quarter percent rate hike, not half a percent. The economist did not foresee that the ECB would go so high due to the prevailing turmoil in the banking and financial markets.
According to O’Brien, the ECB faces the unenviable challenge of delicately balancing rising rates with runaway inflation. For one, rising interest rates could jeopardize the economy and inadvertently trigger a recession. However, allowing inflation to run rampant could also weaken the economy and compromise the financial system. O’Brien comments that it’s a “very, very difficult and fragile situation.”
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Tolu is a Lagos-based blockchain and cryptocurrency enthusiast. He likes to demystify the crypto stories down to the basics so that anyone anywhere can understand them without too much prior knowledge. When he’s not up to his neck in crypto-stories, Tolu likes music, loves to sing, and is an avid movie buff.
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