The European Central Bank (ECB) has recently announced a interest rate rise by half a percentage point, from 2.5% to 3.0% on average for returns on deposits.
In a press release offered by the agency, it was reported that the rates would be as follows: “The Governing Council has decided to raise the three official ECB interest rates by 50 basis points. Consequently, the interest rate of the main financing operations and the interest rates of the marginal credit facility and the deposit facility will increase to 3.50%, 3.75% and 3.00%, respectively, with effect from March 22, 2023”.
The ECB interest rate hike also may have an impact on financial marketsespecially in the foreign exchange market. As the interest rate rises, the euro becomes more attractive to investorsas they can earn higher returns, which can lead to appreciation of the euro against other currencies, such as the US dollar.
The press release reveals the entity’s concern about the possible increase in inflation in the euro area, given that the inflation rate will be below the ECB’s target, which stands at 2%.
Notably raising interest rates is an instrument used by central banks to control inflationsince if the interest rate is low, the cost of money is low, which means that people and companies can borrow more easily, which leads to increased spending and investment, stimulating economic growth.
However, the rise in interest rates also can have negative effects on the economy, as it can discourage spending and investment. In this sense, if the interest rate is high, consumers and companies they can decide to save more and spend lesswhich can reduce demand and slow economic growth, having a negative effect in employment and income.
In any case, the ECB’s interest rate hike should be seen as a measure to maintain financial stability in the euro area and control inflation, taking into account that the world economy is undergoing an uncertain recovery and the European financial sector is in a situation of volatility. The rise in the interest rate also reflects the ECB’s confidence in the soundness of the European financial systemparticularly from banks, and their commitment to ensure financial stability and economic recovery in the region.
The statement states that “The Governing Council is prepared to adjust all its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the proper functioning of monetary policy transmission”.
Due to the latest events on the banking system, both in the United States and now in Europe, they state that “ECB experts now forecast inflation to average 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025”.
However, the President of the ECB, Christine Lagarde, at a press conference, assured that the agency is prepared to preserve price stability and financial stability of the euro area.
In addition, In the official Twitter account of the European Central Bank, the inflation figures for the euro area have been released, as well as the new growth projections for the next three years.taking into account the most recent events.
President Christine @Lagarde introduces the economic growth outlook for the euro area pic.twitter.com/p3AuyVpGDi
—European Central Bank (@ecb) March 16, 2023
President Christine @Lagarde introduce the inflation outlook for the euro area pic.twitter.com/jQ37hySzDo
—European Central Bank (@ecb) March 16, 2023
They explain in the statement that “the new macroeconomic projections of the ECB staff were finalized at the beginning of March, before the recent appearance of tensions in the financial markets. Consequently, these tensions add uncertainty around the baseline scenario assessments for inflation and growth.”.
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