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European Central Bank raises interest rates for the first time in 11 years to zero percent!

Geoff Riley

22nd July 2022

The European Central Bank has raised their main monetary policy interest rate by 0.5% - the first increase for eleven years. Rates have risen to 0.0%!

Many of the world's leading central banks face a policy dilemma. Inflation has returned with consumer prices accelerating by more than 10 per cent in some countries including the UK.

How far and how fast should interest rates be raised as monetary policy tightens in response to inflationary fears?

Move too soon and too quickly and the risks of recession increase. But delaying an interest rate response might cause inflation to end up significantly higher and bring about many of the economic and social costs associated with fast-rising prices.

The ECB is the central bank for the euro, a currency used by 19 out of 27 member states. Nations inside the European Monetary Union must accept a "one-size-fits-all" policy interest rate.

The euro area consists of Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.

In March 2016, the European Central Bank (ECB) reduced its interest rate to zero and then lowered rates to -0.5%. This is the rate that the ECB offers to banks for overnight loans. Commercial banks use these loans to ensure liquidity in the short term.

Inflation rates vary widely across the monetary union - in June 2022, inflation was highest in Estonia (22%) and lowest in Malta (6.1%) with an average of 8.8% for the currency union as a whole.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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