Bond purchases are stopped
ECB raises key interest rate by 0.25 points in July
06/09/2022, 1:50 p.m
Inflation in the euro zone rises to record highs. The ECB wants to remedy the situation with a course correction. For the first time in eleven years, the monetary authorities have announced an increase in the key interest rate. The controversial purchases of securities are also to be dropped. Experts say: too late, too hesitant.
The European Central Bank, which is under pressure from extremely high inflation, wants to pull the plug after more than a decade of extremely loose monetary policy. After a council meeting in Amsterdam, the ECB announced that it intends to raise interest rates by 0.25 percentage points in July. It would be the first increase since 2011. The prerequisite for this is to stop the bond purchases, which are controversial, especially in Germany. This is now scheduled for July 1st. Further interest rate increases are then planned until the end of 2022.
The euro central bank expects another step up at the September meeting. How strong he will be is still open. However, a larger step is appropriate if the medium-term inflation outlook remains poor or even bleak until then, the currency watchdogs said. After September, the ECB expects smaller upward moves. The key interest rate in the euro zone is 0.0 percent, the penalty rate for deposits from commercial banks at the ECB is minus 0.5 percent.
“Three Months Late”
“The end of securities purchases was overdue and is at least three months too late,” said Friedrich Heinemann from the Mannheim research institute ZEW. “The ECB has always fought inflation that was too low quickly and with all available means. On the other hand, Europe’s central bank is very slow in countering the inflation that is now much too high.” There is fear of a new euro debt crisis, which paralyzes the ECB and damages its credibility.
Criticism also came from the German economy. “This schedule is still too hesitant,” said the chief executive of the banking association, Christian Ossig. The deposit interest rate of currently minus 0.5 percent that banks have to pay for money parked at the ECB would remain in negative territory at least until September if the interest rate hike is planned. “The fundamentally changed price environment no longer justifies a negative key interest rate until autumn,” said Ossig. The ECB should therefore end its negative interest rate policy in July and thus before the summer break with an increase of half a percentage point in one step. “That would be a clear and urgently needed signal to consumers, companies and collective bargaining parties,” said Ossig.
Criticism of the ECB’s course also comes from family businesses. “Due to its complete misjudgment of inflation, the ECB is now being driven and must send a clear signal that it still takes price stability seriously,” said Managing Director Albrecht von der Hagen. “There can be no talk of a cleverly initiated turnaround in monetary policy.” The ECB has long since lost sight of its actual task – to ensure stable prices. The flood of money from the ECB is considered one of the main drivers of core inflation. “The costs for citizens and companies are already irresponsibly high,” said von der Hagen.
In emergency mode for years
For years, following the global financial crisis, the Greek sovereign debt crisis and the coronavirus pandemic, the ECB has been in emergency mode – with interest rates still at historically low levels and bond purchases once intended to fuel more inflation. In total, the central bank currently has public and private debt instruments worth around five trillion euros through several programs.
The ECB is aiming for an inflation rate of two percent as the ideal value for the economy. For years, inflation was far too low from the ECB’s point of view. In the meantime, however, the picture has changed radically, with high energy prices recently being fueled by the war in Ukraine. Food and many raw materials as well as preliminary products for industry have also become significantly more expensive. In May, inflation in the euro area was 8.1 percent – a record. According to experts, if this only solidifies via a so-called wage-price spiral, it will become increasingly difficult to return to more normal areas. Interest rates have already been raised significantly in the USA and Great Britain.