For the first time in over a decade, the European Central Bank (ECB) has announced that it will soon raise interest rates in a bid to control runaway inflation, which reached 8.6% in the Eurozone in June. This is a major shakeup after years of affordable credit within the EU.
The ECB is now playing a delicate balancing act, attempting to curb inflationary pressures without placing further constraints on the European economy, which has been hit hard by external shocks over the last few years.
The central bank has now announced that interest rates will rise by 0.5 percentage points. This significant increase will spell the end to the -0.5% negative interest rate offered by the ECB to borrowers since 2014. That way, borrowing will be made significantly less attractive but will help curb some Eurozone’s inflationary pressures.
Throughout the crisis, experts have implored the ECB to take decisive action to intervene and help control inflation. In the US, the Federal Reserve has been desperately fighting to control inflation, while the ECB has so far taken a more laissez-faire approach to control inflation.
Some have accused the ECB of having failed in its regulatory functions, as inflation has now far exceeded the 2% annual inflation target. The markets are expecting more decisive action from the ECB, as reflected by a recent rebound in the value of the Euro against the Dollar, which reached parity on 13 July.
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There are concerns that an increase in interest rates could lead to a surge in borrowing rates, aggravating Europe’s already tenuous debt situation. Countries need affordable interest rates in order to keep up with payments on their national debt. EU Member State Italy has been struggling to cope with its significant foreign debt, and higher interest rates risk sending the country into a debt spiral.
To this end, the ECB has also announced that it will unveil a new “anti-fragmentation” measure to combat a surge in borrowing rates. The measure will seek to bridge the spread between borrowing rates in richer member states and protect countries with a weaker credit situation.
There are hopes in Belgium that inflationary pressures will begin to fall from next year. The Federal Planning Bureau predicts that, from next year, household purchasing power will recover as real per capita incomes and government support will outstrip inflation.
