The interest rate path of the ECB continues to rise

The interest rate path of the ECB continues to rise

2023-05-04 18:57:00

Dhe European Central Bank has once again raised its key interest rates. At the same time, its President Christine Lagarde has assured that the ECB, unlike the Federal Reserve in Washington, is not thinking of sticking to the rate hikes.

Because the rate of currency depreciation will remain well above the target of 2 percent for the foreseeable future, the interest rate path will continue to rise, albeit not with increases of half a percentage point as before, but with increases of a quarter of a percentage point.

The ECB stays on course

In the past twelve months, the ECB has raised its key interest rates much faster and more significantly than its notorious critics in Germany had predicted. The critics had initially announced that the ECB would not raise its key interest rates at all because otherwise the euro zone would collapse. When the ECB first hiked interest rates and the eurozone didn’t collapse, they said the ECB would have to stop quickly or the eurozone would collapse.

The ECB has stayed the course and the eurozone has still not collapsed. Today, on the other hand, it is not uncommon for people in politics and business, who loudly demanded higher interest rates when interest rates were low, to complain that interest rates are far too high. There are good reasons to leave monetary policy to an independent institution.

Even if some of its critics make a fool of themselves, the ECB is not wearing a clean slate either. It watched inflation for too long and reacted too late. The problems are now becoming apparent: once the inflation rate has gotten out of hand, even experts find it difficult to calculate an optimal interest rate path.

Nobody can say precisely how high the key interest rate must rise in order to defeat inflation quickly. The dilemma is well known from history: around half a century ago, the Deutsche Bundesbank found itself in such a situation.

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