On Thursday, the European Central Bank (ECB) raised its key interest rate for the third time in just six months.
The ECB increased the key interest rate by no less than 0.75 basis points, bringing it up to 2%. The measure is intended to reduce lending and thereby lower inflation. In September, the Eurozone’s inflation rate was 9.9%, well above the target of 2%. Speaking to our colleagues from RTL.lu, the Governor of the Luxembourg Central Bank, Gaston Reinesch, confirmed that people should expect “several” more interest rate hikes over the coming months. However, Reinesch declined to speculate on the magnitude of these increases.
-> European Central Bank: ECB raises benchmark rate by 75 basis points to 1.5%
The Governor of the Luxembourg Central Bank pointed out that the 2% rate is “not the most relevant rate” at the moment. This is because this is the rate at which banks borrow money from the central bank, but the banking system currently has “considerable reserves.”
According to Reinesch, the rate that private banks pay when they deposit reserves with the central bank is currently more relevant, having been raised from 0.75 to 1.50%. The Governor of the Luxembourg Central Bank explains that this rate will have the largest impact on interest rates in the coming months.
Either way, the ECB continues to scale back its loose monetary policy of recent years, despite the risk of recession. Reinesch declared, however, that the stagnation or slight decline in economic activity in the Eurozone at the end of this year, or the beginning of next year, shouldn’t be “substantial” and also merely “temporary”. By fighting inflation, the ECB also stabilises the economy in the medium term, according to the governor.
Everyone suffers from inflation, says Gaston Reinesch. “And 10% inflation… think about that for a second.”
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