What does the European rate hike mean for you?
The European Central Bank, the ECB, is raising interest rates by a quarter of one percent next month. More increases may be on the way in September. Next month’s increase is the first rise in eleven years.
The rate hike had been on the cards for several months and the prospect had already pushed up the cost of borrowing both for individuals and for business. Savers can look forward to a bigger reward but at the minute with low rates inflation is eating into any deposits.
The rate hike is intended to cool the economy: to get people to spend less and save more and lower inflation.
Inflation i.e. the rate at which prices increase is at its highest level for many years: 8% on average across the EU.
By increasing the cost of borrowing and making investments more expensive the ECB hopes to cool the economy and lower inflation to an acceptable level of say 2%.
The ECB and other central banks lowered rates to historic lows after the 2008 global financial crisis when commercial banks got into trouble when mortgages were granted to people who didn’t stand a hope in hell of ever repaying them. Quantitative easing also meant central banks were printing money like their was no tomorrow . When the economy rebounded after the pandemic inflation took off also boosted by Russia’s war against Ukraine.
The ECB has now also voiced concerns about spiralling wage costs as workers are eager to see their income keep step with higher prices. In Belgium most wages are automatically topped up as inflation rises, but in the past from time to time governments have given the index-linked pay increases a time-out.