Europe raises interest rates to a record level to counter inflation

Europe has decided to implement the largest interest rate increase in its history, following in the footsteps of the US Federal Reserve and other central banks, amid the global scramble for high credit rates aimed at quelling record inflation.

When most orthodox economists are asked about the best antidote to curbing hyperinflation, the answer is almost unanimous: interest rate increases by central banks.

Yet it is a cure that, many fear, could be worse than the disease itself: By directly affecting consumption, higher interest rates tend to cool economies, and thus cause recessions.

Faced with an inflationary spiral with few precedents in history, the world’s central banks have chosen this option.

During the worst moments of the crisis, central banks kept interest rates historically low in order to revive the economy through higher consumption. With prices unstoppable, the strategy now is just the opposite.

With inflation at its highest level in half a century and approaching double-digit territory, policymakers worry that rapid price growth is taking hold, melting household savings, discouraging investment, creating a downward spiral, and making prices and wages hard to break.

The European Central Bank, lagging behind its peers

After a decade of ultra-low rates, the central bank of the 19 countries that use the euro raised interest rates on Thursday, September 8, by 75 basis points to 0.75% from 0% last July. The reserve went in the same direction.

This is the highest increase since 2011 and it means that you will start receiving interest on the money you lend, as you haven’t done in a long time. Even the ECB rates were negative, which basically means that it is not the commercial banks that charge them for lending money, but rather that they are charged for holding the excess cash.

After raising interest rates to an unprecedented level, the European Central Bank also promised further increases, prioritizing fighting inflation even as it heads toward a potential recession and energy rationing.

But there are those who see this as an ineffective strategy, because central banks are unable to cope with inflation when it is caused by disturbances on the supply side rather than the demand side.

In other words, there is very little chance that central banks will be able to cut prices when the problem is not with higher consumption, but with short supply, as is the case with natural gas in Europe.

(taken from France 24)