Highest ECB interest rate ever approaching, as series of hikes is not over yet

This article was last updated on June 27, 2023

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Key Points:

• ECB is set to raise interest rates again in July, reaching the highest level since the start of the euro
• This will be the ninth hike in a year, with the possibility of reaching a rate of 3.75 percent
• The aim of these rate hikes is to combat high inflation by reducing borrowing and expenditure
• Higher interest rates also affect the savings interest that consumers receive
• ABN AMRO has already increased savings interest four times this year as a result
• ECB President Lagarde expects further interest rate hikes after the summer
• Inflation is expected to remain high due to wage increases by employers

Background:

With the European Central Bank (ECB) continuously raising interest rates, the highest ECB interest rate since the introduction of the euro is now within reach. In June, the ECB increased interest rates for the eighth time in a year, bringing it to 3.5 percent. The last time the interest rate was higher than this was between the fall of 2000 and the spring of 2001, when it reached 3.75 percent. There is a strong possibility that this level will be reached in July, marking a significant milestone in ECB’s history.

The objective of the ECB’s interest rate hikes is to combat high inflation. By making borrowing more expensive, the hope is to slow down expenditure and ultimately reduce inflation. However, these interest rate hikes also have an impact on the interest that consumers receive on their savings. As a result, ABN AMRO, a prominent bank, has increased its savings interest four times this year alone.

Continued Interest Rate Hikes:

During a speech at a meeting of central bankers, ECB President Christine Lagarde indicated that there are more interest rate hikes to come. She stated that the peak of interest rates has not yet been reached and emphasized the importance of clear communication to prevent investors from speculating on future interest rate cuts. Lagarde believes that these rate hikes are already having an effect, as the demand for loans has been declining. However, she also noted that inflation is likely to remain high due to significant wage increases by employers. These higher wage costs can lead to price increases, further contributing to inflationary pressures.

Implications:

The series of interest rate hikes by the ECB has significant implications for various stakeholders. Borrowers will face increased borrowing costs, potentially affecting their ability to finance investments or other expenses. On the other hand, savers may benefit from higher interest rates on their savings. ABN AMRO’s decision to raise savings interest multiple times this year highlights the impact of these interest rate hikes on consumer finances.

For investors, the expectation of continued interest rate hikes suggests that the ECB is committed to addressing inflation and may indicate a more restrictive monetary policy. This can have implications for equity and bond markets, as higher interest rates tend to reduce the attractiveness of stocks and bonds. Investors should carefully monitor the developments in interest rates and adjust their investment strategies accordingly.

Furthermore, businesses should consider the potential impact of higher interest rates on their operations. Increased borrowing costs can affect their profitability and expansion plans. Additionally, the wage increases mentioned by Lagarde may contribute to rising production costs, which could be passed on to consumers in the form of higher prices.

Conclusion:

The approaching highest ECB interest rate in history highlights the central bank’s commitment to addressing high inflation. The series of interest rate hikes aims to slow down expenditure and reduce inflationary pressures. While this may benefit savers, borrowers and businesses will face higher costs. The continued interest rate hikes signal that the ECB is not done yet and that further rate increases are expected after the summer. Investors and businesses should closely monitor these developments and adjust their strategies accordingly.