The European Central Bank Increases Interest Rate by 0.25 Percent

The European Central Bank (ECB) announced an increase in three pivotal interest rates by 0.25 percent.

by Faruk Imamovic
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The European Central Bank Increases Interest Rate by 0.25 Percent
© Getty Images News/Ralph Orlowski

The European Central Bank (ECB) announced an increase in three pivotal interest rates by 0.25 percent. This marks the highest level these rates have ever reached, a decision that has resonated deeply.

Unraveling the ECB's Decision

During a pivotal meeting of the ECB's governing council in Frankfurt, the decision to bump up the key interest rate for the 10th consecutive time by 25 basis points was finalized.

Consequently, the main refinancing rate will now stand at 4.50 percent. Additionally, the marginal credit rate will climb to 4.75 percent and the passive interest rate on deposits will touch 4.00 percent. This determination springs forth after European officials slashed their predictions for economic growth in the eurozone.

Furthermore, there were growing concerns about inflation, with fears that it might remain dangerously high for an extended period. By elevating these key interest rates, Europe aims to draw closer to its target of restoring inflation to a safer margin of two percent.

When the key interest rate is amplified, it makes borrowing from the central bank more costly for commercial banks. To offset these surging expenses, these banks, in turn, heighten their loan charges. The domino effect continues as customers then tend to opt for fewer loans.

Concurrently, banks curtail borrowing from central banks, leading to a shrinkage in the money supply. The upshot? Every euro in circulation becomes more valuable, leading to a decrease in consumer prices.

What Does This Mean for Bank Consumers?

The hike in the deposit interest rate directly affects those with savings or checking accounts that accrue interest.

For those diligently saving, this could spell good tidings. It may signify the termination of negative interest rates, a change which is contingent on the balance maintained in the bank. But, on the flip side, those utilizing overdraft facilities must tread with caution.

Shifts in the key interest rate could potentially alter the interest on overdrafts. Additionally, this uptick also casts a shadow on loans. As the variable interest rate experiences a surge, borrowers might find themselves shelling out more.

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