Unprecedented European Central Bank interest rate hike

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The European Central Bank has hiked interest rates by 75 basis points, the highest rise in the 20 year history of the euro, in an attempt to tackle record inflation.

Concerned that Europe-wide interest rates were 9.1% in August – nowhere near the target 2% – the bank’s governing council has also predicted further interest rates in future.

‘After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023,’ it announced in a press release.

‘Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity. In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers.’

The rise has not been a surprise for economists and banking experts, many of whom have been calling for stiff increases in the interest rate, according to the Financieele Dagblad. There are increasing worries amongst national and local politicians about the effects of inflation on ever more households in the Netherlands.

Higher ECB interest rates will directly and indirectly affect mortgage rates, student loans, the cost of credit and interest on savings.

ECB president Christine Lagarde said the decision was unanimous and an effect was expected in six to nine months. The ECB deposit rate is now 0.75% and the main refinancing rate is 1.25%, the highest since 2011. Despite the second ECB interest rate rise this year, a recession is widely expected this winter.

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