The European Central Bank (ECB) announced on Thursday that it would keep interest rates at historically low levels.

A decision that not everyone agrees with, because inflation is rising fast, critics say.

But what does interest have to do with inflation?

And why is it bad if inflation rises?

What exactly did the ECB announce on Thursday?

The ECB has announced that the central bank will not turn the interest rate knob.

As a result, key interest rates remain at historically low levels.

Banks can continue to borrow money for free from the central bank and even have to put money into savings that they store with the ECB.

Why does the ECB choose this?

The ECB is doing this to ensure that consumers and businesses let their money flow so that the economy can continue to recover from the corona crisis, says Hugo Erken, head of Dutch economics at Rabobank's research department.

"If interest rates are raised, it becomes more expensive for businesses and consumers to borrow money, so that cools the economy."

Sounds logical, but what does this have to do with inflation?

Inflation generally moves with the economy, explains Bert Colijn, economist at ING.

When the economy is doing well, people spend more money.

The bakers, bicycle shops and holiday providers notice that they can charge a little extra for their products, and are increasing the price, causing inflation to rise.

"With low interest rates, consumers are incentivized to spend more money," says Colijn.

"After all, it is less attractive to leave money in a savings account. That is why interest is used as an instrument to influence inflation."

Okay, so inflation could rise due to the ECB's interest rate policy.

But is it so bad when inflation rises?

Economists generally find inflation of about 2 percent ideal.

"You want to have stable price growth in your economy," says Colijn.

If consumers and entrepreneurs can count on a little inflation, they know that their debt and investments are shrinking in relative terms as a result of that price growth.

That mortgage of 800 euros per month may now be a big bite out of your salary, but if your salary continues to rise with inflation, you can pay it more and more in the future.

However, too much inflation is also not desirable.

Erken: "If inflation rises too much, an economy is also slowed down. The purchasing power of consumers then deteriorates rapidly, the international competitive position can be affected and ultimately the prospects on the labor market deteriorate."

Do we run the risk of inflation rising sharply due to the ECB's policy?

Some economists are afraid of that, Erken explains.

These economists note that the prices of many products, such as petrol at the pump or a beer on the terrace, are rising rapidly.

These price increases are likely to be temporary, as a result of higher commodity prices.

But according to the critics, we are not sure whether prices will continue to rise.

The peak in inflation can therefore be one-off, but also structural.

And if prices continue to rise, we will have to deal with structurally high inflation.

"But there's no strong evidence at this point that this will happen," says Colijn.

What is the ECB doing to prevent that?

"The ECB keeps a very close eye on what prices are doing," says Erken.

"They also use a lot of information from household and business surveys. And if they see inflation fears rising, the ECB will first send out mild signals not to let inflation expectations rise further."

For example, ECB president Christine Lagarde will indicate in a speech that the central bank is keeping a close eye on prices, reassuring the market.

Erken: "And if it is really necessary, the ECB can always step on the brakes and raise interest rates."

Keywords: