ECB raises eurozone interest rate by 0.5%

The European Central Bank hiked on Thursday its interest rate by 0.5%, in its latest review this year, as it tries to control rising inflation in the Eurozone.

The central bank in Frankfurt raised its benchmark interest rate — what it charges commercial lenders for borrowing money — for the fourth time this year to 2.5%. 

Highest rate since 2008 financial crash

That is the highest for the eurozone since 2008. But it's still lower than it was at any point prior to that.

In response to the financial crash, central banks around most of the world sunk their rates to unprecedented lows and broadly speaking kept them there for more than a decade. 

The ECB's Christine Lagarde said on Thursday that despite progress in recent months, "we are in for a long game."

Lagarde added that the ECB expected to continue raising interest rates for a while.

"We judge that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target.'

It also comes hours after the Federal Reserve in the US raised its rate by the same amount, albeit to a higher level.

Benchmark rates are far lower than what ordinary people tend to pay on their mortgages or loans, and slightly lower than the rates they recoup on savings, but they have a decisive impact on the interest payments of ordinary people all the same. 

Raising interest rates throughout the year

Central banks around much of the world have been taking similar steps repeatedly in 2022, seeking to keep inflation in check while not halting growth or prompting a recession. 

In 2022, the bank has been significantly more reluctant than the US Federal Reserve to raise interest rates throughout the year.

The ECB waited until July to raise its rates at all. Benchmark borrowing rates in the Eurozone are now between 2.5 and 2.75, far lower than in the US.

Who else raised interest rates this week?

In the UK, the Central Bank of England hiked on Thursday its key interest rate by a 0.5% point to 3.5%, which is the highest level in 14 years.

The decision is the ninth consecutive increase for the bank since December 2021.

Switzerland's central bank opted for a similar 0.5% point rise on Thursday, albeit to a level of just 1%. Inflation has started slowing in Switzerland, and is lower than in many comparable economies, but still stood at 3% in November year-on-year. 

Norway meanwhile did a smaller 0.25% point increase on Thursday.

On Wednesday, the Federal Reserve introduced a base interest rate to stand at between 4.25% and 4.5%.

Like the ECB, it has decreased the pace of increases, following four consecutive 0.75% rises before Wednesday's. 

The Fed had repeatedly signalled it would would slow its interest rate hikes as inflation started to drop toward its targeted level of 2%.

Why have banks been raising interest rates?

The year 2022 brought unusual turbulence to the global economy, as two years of a global pandemic which prompted major lockdowns was closely followed by Russia's war on Ukraine. 

The impacts on energy and food prices, in particular, have contributed to unusually high inflation around most of the world.

Raising interest rates is a policy tool which central banks worldwide resort to in order to battle inflation. It is designed to discourage borrowing and spending, in an effort to reduce demand and consequently prices.

However, it is a balancing act that can also slow economic growth or lead to a recession.

rmt/msh (AFP, Reuters)