ECB raises key interest rate again because of Iran war and inflation

The European Central Bank (ECB) is reacting to the oil price shock resulting from the Iran war with the second interest rate increase this year. The central bank is raising the deposit interest rate, which is important for banks and savers, from 2.25 to 2.5 percent. This was decided by the ECB Council, which, exceptionally, did not meet at the central bank's headquarters in Frankfurt, but in Berlin. Once a year, the meeting of the Governing Council of the ECB is hosted by a national central bank; this year the Deutsche Bundesbank is hosting it.

“The conflict in the Middle East continues to generate inflationary pressures, and inflation is expected to remain well above our target for an extended period,” the central bank said. The outlook is “still subject to a high degree of uncertainty,” with the threat of higher inflation and less economic growth.

Higher key interest rates make loans more expensive for consumers and companies, which can slow down demand and thus dampen inflation. Savers can benefit if banks pass on the better conditions. At the same time, however, rising interest rates are a burden for everyone who wants to invest - from private households to companies. If the ECB raises interest rates too much, it could stall the economy.

Iran war fuels inflation

The central bank's most important goal is to keep inflation under control and ensure a stable euro. The war between the USA and Iran, which has been simmering since the end of February, has driven up inflation sharply.

In August, consumer prices in the euro area were 3.3 percent higher than in the same month last year, according to an initial estimate by the statistics agency Eurostat. This is the highest inflation rate since September 2023 and is well above the ECB's target, which aims for price stability at 2.0 percent inflation for the euro zone in the medium term. The higher the inflation rate, the lower people's purchasing power. You can then afford one euro less.

In Europe's largest economy, Germany, high energy prices drove inflation to 2.9 percent in August. Other large euro countries such as France and Spain also reported increased inflation rates.

Savings interest rates increased

Savers benefit from higher interest rates: According to an analysis by the comparison portal Verivox, daily interest rates for new customers have risen, with limited-term offers peaking at more than four percent (as of September 8th). The average fixed-term deposit interest rates rose significantly to 2.55 percent for systems available nationwide with a two-year term.

On the other hand, rising capital market interest rates are a disadvantage for property buyers and builders, even if the building interest rates are not directly based on the key interest rate. According to an analysis by the money guide Finanztip, the effective interest rates for real estate loans with a ten-year fixed interest rate have climbed to around 4.2 percent. This is the highest level since the end of 2023.

Expensive energy could also drive up other prices

The pressure on the ECB is not letting up for the time being. Recently, the Iran conflict flared up again. Because the Strait of Hormuz, which is important for world trade, has been effectively blocked for months, crude oil prices have risen significantly. Drivers feel this at the gas stations, homeowners feel it when it comes to heating oil prices. Gas prices also rose. Since Europe imports energy, the high prices have a direct impact on inflation.

The longer energy prices remain high, the greater the risk that other prices will also rise because, for example, transport and refrigeration of food becomes more expensive. In addition, there are the consequences of heat and drought, which reduce the harvest or, like the low water on the Rhine, make deliveries more expensive. The ECB also fears second-round effects: If wages rise too much in response to high inflation, this could drive prices further up.

Will the ECB continue to raise key interest rates?

In June, the ECB raised key interest rates for the first time in almost three years in response to a surge in inflation as a result of the Iran war. The central bank absolutely wants to prevent another price wave in the euro area. After the start of the Ukraine war in 2022, she was criticized for having long underestimated the price increase during the energy crisis. Inflation in the euro area shot up to more than ten percent. Since inflation has recently increased significantly again, economists believe that further interest rate increases by the ECB are possible this year.