The European Central Bank (ECB) raised interest rates to 4 percent on Wednesday afternoon. Why does the bank do that and what does that mean for the citizen?
Will I finally get more interest on my savings account?
That has not been said. The banks are taking full advantage of the interest rate increases. They make borrowing more expensive, but the higher interest rates are only gradually passed on to the saver and with a long delay. This results in significant profit increases for the banks. This interest rate increase will probably be passed on gradually, while borrowing, for example for a mortgage, will quickly become more expensive.
Savers grumble, but continue to save, despite the low savings interest rate. There is therefore no need for the banks to significantly increase savings interest rates. Moreover, the banks do not believe that they earn too much from the higher interest rates. According to the banks, they are now finally making a healthy margin on interest rates again.
Why is the ECB actually raising interest rates?
The bank does this to curb persistently high inflation. Inflation is high because there is high demand for goods and services, while supply is lagging behind. And as long as demand exceeds supply, suppliers can increase the price. Raising interest rates makes borrowing more expensive. That should slow down demand. And that should ensure that prices rise less rapidly. And low inflation is in everyone’s interest.
Inflation is already falling, why are interest rates being raised again?
The ECB still thinks inflation is too high. But after this latest interest rate increase, the ECB is ready for the time being, ECB President Christine Lagarde announced. Because raising interest rates also has risks. Perhaps demand is being slowed down too much. Then the economy could simply end up in a recession. And that can lead to rising unemployment and government cuts. Critics point out that the economy in the eurozone is already cooling considerably and the interest rate increase is unnecessarily pushing the economy further into the hole.
All in all, for the time being we have the burdens, but not the benefits, of the higher interest rates. But as Lagarde emphasizes, high inflation for a long time continues to erode purchasing power and eventually leads to a severe recession.
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