Soaring inflation within the eurozone has led to the European Central Bank (ECB) raising interest rates for the first time in 11 years.
The ECB increased its key interest rate by 0.5 percentage points to 0.0 percent and is planning further hikes this year.The rate has remained negative since 2014 in an effort to boost the region’s economy following years of lack of growth.
However, consumer prices rose at a record 8.6 percent in the 12 months to June as food, fuel and energy costs skyrocketed. This represents a figure well above the bank’s 2 percent target.
The Bank of England and the US Federal Reserve also put up rates in an attempt to curb rising prices.
The increase in everyday costs have largely been attributed to the war in Ukraine and Covid supply chain issues.
The eurozone is vulnerable because it relies heavily on Russia for its oil and gas – despite this European Union leaders agreed to ban most imports of the aforementioned fossil fuels. This week the parliament urged member states to begin rationing supplies amid fears Moscow will halt gas deliveries this year, causing further price spikes.
ECB president Christine Lagarde explained the reason behind the rise in rates: “Economic activity [in the eurozone] is slowing. Russia’s unjustified aggression towards Ukraine is an ongoing drag on growth.”
“We expect inflation to remain undesirably high for some time owing to continued pressure from energy and food prices and pipeline pressures in the pricing chain,” she added.
The bank says further rate hikes “will be appropriate” and that it will take a “meeting-by-meeting” approach.
The thinking behind this is, that by making it more expensive to borrow money, people will spend less, which will in turn decrease demand and by extension prices.
Some commentators have warned that higher rates could see the bloc fall into recession – defined as two successive quarters of economic decline.
There has also been criticism from economists that the ECB has moved too slowly, given that the UK and US began raising their rates months ago.
Carsten Brzeski, chief Eurozone economist at ING bank, stated: “In hindsight, the very gradual and cautious normalisation process the ECB started at the end of last year has simply been too slow and too late.”