The European Central Bank (ECB) has raised interest rates for the first time in more than 11 years as it controls eurozone inflation. The ECB raised its key interest rate by 0.5 percentage points to 0.0% and plans to hike further this year.
The rate has been harmful to boosting the region’s economy after a weak growth rate since 2014. But consumer prices rose by a record 8.6% in the 12 months to June due to growing food, fuel and energy costs.
This is well above the bank’s target of 2%.
This comes as the Bank of England and the US Federal Reserve kept their rates up to rein in rising prices. Inflation is the pace at which prices are rising. For example, if a bottle of milk costs €1 and rises by 5 cents compared with a year earlier, then milk inflation is 5%.
Ukraine war and COVID supply chain issues have increased everyday costs worldwide, increasing household pressure.
The eurozone is vulnerable because it relies heavily on Russia for its oil and gas. This week it urged member states to start supplying rations amid fears that Moscow would halt gas deliveries this year, leading to further price hikes.
ECB President Christine Lagarde described her decision to raise rates: “Economic activity [in the eurozone] is slowing down. Russia’s undue aggression toward Ukraine is a constant drag on growth.
“We expect inflation to remain undesirably high for some time due to continued pressure from energy and food prices and pipeline pressure across the value chain,” he said.
The bank says further rate hikes will be “appropriate” and take a “meet-by-meet” approach to raise rates. However, there are concerns about how high borrowing costs will affect highly indebted European countries, including Italy and Greece.