European Central Bank increases key interest rates to 2.5 percent

The European Central Bank (ECB) increased key interest rates today. As expected, the relevant interest rate for deposits increases by 0.25 percentage points to 2.5 percent. It is the second interest rate increase in the euro area this year.

Why did the ECB raise key interest rates?

The ECB Council has decided to increase the key interest rate because inflation in the euro area has risen significantly again. It is currently 3.3 percent. This makes it significantly higher than the 2 percent that the central bank is aiming for.

What are the reasons for the high inflation?

The main reason is the war between the USA and Israel against Iran. As a result, there are drastic bottlenecks in the supply of oil, natural gas and some other important raw materials that come from the region around the Persian Gulf. Because of the war, passage through the important Strait of Hormuz is largely blocked. This has led to a sharp increase in oil and gas prices. Fertilizers, most of which are exported from the region, are also affected. In Germany, a liter of E10 gasoline costs around 50 cents more than before the start of the war. Heating oil and natural gas have also become similarly expensive.

Where else are consumers particularly affected?

Food has become significantly more expensive in recent months. Large amounts of energy are required to produce many products - for example baked goods, dairy products or chocolate. Poor harvests and sharp increases in fertilizer prices also make many goods more expensive. However, food prices in Germany have not so far increased as much as originally feared. The background is the massive price war in German retail, which is why many producers find it difficult to implement price increases. The prices for services continue to be very high, especially for craftsmen's services.

Will prices continue to rise?

This is very likely if the war in the Persian Gulf continues. Many analysts expect oil prices to rise in the next few weeks because the economy in the euro area is recovering slightly and is likely to result in strong demand for energy. The ECB does not expect inflation to fall until the end of next year.

What does this mean for credit customers?

The higher interest rates make consumer loans more expensive. Anyone planning larger purchases must take into account higher financing costs. Construction interest rates are also likely to become more expensive. However, they are already at a disproportionately high level. They have long since decoupled themselves from the ECB's interest rate policy.

However, anyone who wants to invest their money in the short to medium term as a fixed-term deposit or overnight deposit will now receive higher interest rates. Numerous banks have already responded in advance with good conditions.

What consequences do higher interest rates have for the economy?

For companies, the higher interest rates make the costs of investments more expensive. This is problematic because investments in Germany have been declining for years and are too low - a central factor for the current economic weakness.

However, it is not primarily the interest rate level that is deterring companies from making new investments - rather, other well-known problems are paralyzing the economy, such as high energy costs, poor infrastructure, excessive bureaucracy, a lack of skilled workers and a significant consumer reluctance to buy. Many economists therefore do not see the interest rate increase as having any significant negative impact on companies or economic development as a whole.

Are there any further interest rate increases from the ECB this year?

This is still unclear and depends in particular on further developments in the Middle East and energy prices. The ECB has made it clear several times that it will not tolerate an inflation rate that is too high or inflation that persists for too long.

The central bankers are still being criticized for having reacted far too late to the last surge in inflation a few years ago, which also saw double-digit inflation rates in Germany. The monetary authorities do not want to repeat such a mistake. Some financial markets are still expecting a third rise in interest rates this year.

Why doesn't the US Federal Reserve react in the same way as the ECB?

Inflation in the USA is still significantly higher than in the euro area. The otherwise similar or identical monetary policies of the two central banks have diverged significantly in recent months. In contrast to the ECB, the Federal Reserve not only looks at the inflation rate, but also at the labor market. It's not going badly, but it's not so booming that interest rate increases should weaken the economy.