Dhe European Central Bank is raising interest rates by 0.5 percentage points. The central bank announced this on Thursday after the December meeting of the ECB Council. At the same time, the council decided to reduce the trillion-dollar bond holdings.
The ECB is following other major central banks with its interest rate hike: The American Federal Reserve (Fed) also raised its key interest rates by 0.5 percentage points on Wednesday – the Swiss National Bank also increased its interest rates by the same amount on Thursday.
The fight against inflation should continue
It was the ECB’s fourth rate hike this year. The central bank reacted late, but then noticeably to the sharp rise in inflation. The inflation rate in the euro zone was last 10.0 percent in November. It was down slightly from October, mainly due to a lower oil price.
However, it will probably be some time before the ECB’s interest rate hikes take full effect. Possibly, however, the first slight effects on the exchange rate against the dollar have already been seen recently. In Germany, the inflation rate could drop significantly temporarily in December as a result of the state taking over the natural gas discount. Commerzbank “only” expects 7 instead of 10 percent.
On Thursday, the ECB laid down the basics for how to deal with the bond purchases. In the past, the central bank has bought bonds for around 5 trillion euros. She hasn’t increased her holdings since July. However, new bonds are currently still being bought for expiring bonds. That is now set to change next year: At least in the case of the older APP bond purchase program, all maturing bonds are no longer to be completely replaced by new ones.
This step is called “QT”, “Quantitative Tightening”, i.e. quantitative streamlining – the opposite of “QE”, “Quantitative Easing”, the bond purchases. However, there will probably be no sales of bonds, as was the case recently in Great Britain, at least for the time being.
With the PEPP crisis program, on the other hand, the central bank continues to reserve the right to “flexibly” reinvest the money from maturing bonds in new ones, for example in order to be able to react to a sharp rise in yields on individual bonds from highly indebted countries in the course of the interest rate turnaround. Economists point out that relative to the Fed, the ECB appears to want to reduce its bond holdings at a slower pace.
The next rate hikes are more controversial
It will now be exciting to see how things will continue in the new year. At some point in the course of the year, most observers agree that the major central banks will at least take a break from raising interest rates. But there is likely to be a struggle over how often and how much interest rates will be raised beforehand.
Karsten Junius, economist at Bank J. Safra Sarasin, says the Bank of England will be the first to pause, followed by the US Fed and only then the ECB. Michael Schubert, ECB specialist at Commerzbank, expects a rate hike of 0.5 percentage points at least for the first meeting of the ECB Council in the new year, followed by two interest rate hikes of 0.25 percentage points each before the break.
ECB chief economist Philip Lane recently indicated in an interview with the newspaper “Milano Finanza” that it was assumed that “further interest rate hikes” would be necessary – that didn’t just sound like another one in December.
Berenberg economist Schmieding, on the other hand, thinks that from his point of view the ECB would be “well advised” not to raise interest rates at all next year – because inflation will fall sharply on its own without the ECB “unnecessarily deepening the recession or extend “must. However, many other economists warn that the central bank should not relax too soon in the fight against inflation.
Interest rates for savers on the call money account are also rising
Many banks have already slightly raised their interest rates for customers in recent months. On Thursday, ING Germany announced that it would raise the interest rate for new customers on the call money account from 1 to 2 percent, but only guaranteed for four months.
Katharina Lüth, financial expert at interest rate broker Raisin, commented that the interest rate hike was good news for savers. She is counting on the fact that bank interest rates on savings will now also increase, while inflation has at least stabilized somewhat at a high level and even fell slightly in November compared to October.
In anticipation of the ECB interest rate hikes this year, building interest rates had already risen impressively, from less than 1 percent for building loans with a ten-year fixed interest rate to more than 4 percent at times in October. According to figures from the Biallo consumer platform, there has recently been a slight setback to 3.5 percent. However, this is mostly considered to be only a temporary development.
In any case, Mirjam Mohr, member of the board of directors of the real estate broker Interhyp, says: “In 2023, building interest rates will in all likelihood not rise as much as in 2022.” planning should take this into account, because lenders pass on fluctuations in the interest rate market at different speeds.”