ECB raises interest rates again despite financial market turmoil

The European Central Bank (ECB) has again raised interest rates by half a percentage point, as expected. Although this increase had already been announced by the ECB, there were sounds from the financial sector that the increase could still be somewhat lower.

That has to do with the unrest on the stock exchanges in recent days. The idea was that the central bank could also opt for a less high rise of a quarter percentage point. So that didn’t happen.

In a statement, the ECB says it is “ready to respond if necessary” to the turmoil in financial markets. The bank expresses confidence in the European banking sector, calling it “shock-resistant”. ECB President Lagarde says banks are now more supportive than they were during the previous financial crisis in 2008.

Yesterday, the Swiss bank Credit Suisse fell sharply on the stock exchange and took other bank shares in its wake. Calm returned after it turned out that Credit Suisse could count on support from the Swiss central bank. The unrest began in the US at Silicon Valley Bank that collapsed last weekend. The problems at that US bank led to falling stock market prices of banks worldwide.

‘Reducing inflation’

Raising interest rates is a means that the ECB can use to tackle high inflation. If interest rates rise, in theory, the economy cools down. Loans are becoming more expensive, which would mean less investment. Also, the idea is that consumers then spend less. Whether that will actually help to contain the high inflation will only be visible in a while. It always takes a while for ECB interventions to take effect.

The ECB continues to stick to its own goal of bringing inflation back in the coming years. By 2025, inflation in the eurozone should drop to 2 percent. In January of this year, it was more than 8%.

Lagarde did not want to confirm anything about future interest rate increases. However, she stated that the “commitment to fight inflation does not waver.”