Economy: the ECB raises its key rates to fight inflation, a first in ten years

The President of the European Central Bank (ECB) Christine Lagarde puts on perfume before a meeting with European finance ministers, in Brussels, May 23, 2022. © Olivier Matthys / AP

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2 mins

The European Central Bank, at its relocated meeting in Amsterdam, decided to end its monetary support measures for the economy by ending years of asset purchases and starting to raise its key rates by 25 points from of July, a historic turning point in the euro zone.

These measures are supposed to combat the effects of inflation, a first for more than ten years.

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Caution and flexibility, these are the watchwords for the coming months.

Christine Lagarde, the President of the ECB, outlined the

.

With one caveat, however: their effect will not be immediate on prices and will be seen more over time.

Last to act among the major central banks, the guardians of the euro plan to raise key rates by 25 basis points from July, before another hike in September.

This new rise could be stronger “ 

 ,” warned Christine Lagarde.

It is true that during the last eleven years the efforts of the ECB were concentrated rather

.

But today the risk is the opposite:

which is setting in and economic growth which is not taking off.

In May, inflation exceeded 8% in the euro zone.

Unheard of since the introduction of the single currency and at a level four times higher than the ECB's target, set at 2%.

At the end of the meeting of the Governing Council, the President of the ECB notably raised her inflation forecasts: the Frankfurt institute now expects prices to rise by 6.8% this year, then by 3, 5% in 2023. Despite these forecasts, ECB boss Christine Lagarde persisted: there is no risk of a “ 

 ” which would further fuel the rise in prices.

Food prices rose by 7.5% in May in the euro zone.

This partially reflects the importance of Ukraine and Russia among major global food suppliers.

Soaring prices are gaining more and more sectors of activity.

But some indicators are there to contain inflation.

The labor market is improving, the unemployment rate fell back to the historically low level of 6.8% in April, many sectors are short of manpower, we are seeing the start of a rise in wages, and as the economy recovers, the catch-up effect on wages will be increasingly visible.

According to Christine Lagarde (ECB), “certain indicators are there to contain inflation”

Agnieszka Kumor

For Eric Delannoy, economist and president of the consulting firm Tensing, this gradual response from the ECB is the right approach, because there is still a debate on the sustainability of inflation.

For economist Éric Delannoy, the ECB's gradual rate hike is the "right approach"

Aabla Jounaidi

This announcement obviously has repercussions in Germany.

The German banks are delighted, but the government fears too rapid an increase.

Explanations by Gunther Schnabl, economist at the University of Leipzig.

The German government has again made numerous additional spending commitments in recent years.

It is obvious that these commitments and spending plans are only achievable if the European Central Bank does not raise its interest rates too much.

The banks' point of view is different.

The German banking landscape is still dominated by a large number of small and medium-sized banks.

The very flexible monetary policy of the ECB, in particular the negative interest rates, hurt them very badly.

This is why German banks welcome the rise in interest rates.

And as for German citizens: they have been accustomed to low inflation for a very long time.

This is why they also saved a lot in the form of bank deposits.

Today,

Germans suffer a lot from high inflation.

For them, the rate hike comes too late and is not high enough.

And that is why they are disappointed with the ECB's decision.

University of Leipzig economist Gunther Schnabl says Germans think rate hike 'comes too late', but banks 'welcome rise'

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