The European Central Bank hopes to curb high inflation by raising interest rates for the first time in 11 years

09-06-2022

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The European Central Bank (ECB) will raise interest rates next month. This has not happened in the past eleven years. With the intervention, the regulator hopes to slow down the current inflation somewhat. The first increase of a quarter of a percentage point is planned for July, a second increase in September. The interest rate is now at -0.5 percent, in July it will be raised to -0.25. It is not yet clear how much interest rates will rise in September.

An increase in the interest rate by 25 basis points applies to the so-called deposit rate. This is the interest at which banks deposit money with the central bank for a short period of time. It’s now less than 0.5 percent, which means banks have to pay for the money they’re temporarily storing. This negative interest rate forced many banks to reduce savings rates to zero or even lower.

With this intervention, the ECB hopes that households will tend to save more and spend less. After all, once the demand for products and services goes down, prices will drop as well, or so the idea is. Earlier, the central banks of the US and UK also raised interest rates in order to curb inflation that has been rising for months.

Megan Vasquez

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