The ECB raised rates for the first time in 11 years

Governing Council European Central Bank decided to hike interest rates by 50 bp from -0,5 pp. to zero. The rate hike is higher than it was suggested by the ECB a month ago - then the rate hike by 0,25 bp was announced. However, the scale of the increase is a result of the increasingly stronger inflation in the euro area and the growing pressure to weaken the euro. As announced, since the beginning of July the ECB has completed extending its asset purchase program.

The ECB wants to fight inflation

The increase is to help fight inflation, which in June in the euro zone amounted to 8,6 percent. (for comparison, in Poland it was 15,5 percent). There are, however, significant differences between individual countries in the zone. The highest inflation is recorded in Estonia - 22 percent, Lithuania - 20,5 percent, Latvia - 19,2 percent. and Slovakia - 12,6 percent. The lowest is in Malta - 6,1 percent, in France - 6,5 percent. and in Finland - 8,1 percent. Inflation in Germany, the largest economy in the euro area, amounts to 8,2 percent.

The ECB starts its rate hikes cycle very late. American FED started such a cycle in March this year, a RPP - in October 2021. The delay is related to a significant structural diversification of the euro area economy, which translates into differences in inflation and economic growth. The fight against high inflation in some countries could lead to a strong recession in other countries. Hence the very cautious policy of the ECB.

However, the market has recently put more and more pressure on the ECB, mainly due to the significant weakening of the euro. On July 12, for a while, one euro was paid for less than one dollar, a situation that had not been recorded for almost 20 years. Before the decision to raise the euro, however, it strengthened slightly and now 1 euro costs 1,02 USD. A rate hike may help stabilize the euro exchange rate.

The rate hike will also mean higher debt servicing costs by the euro zone countries. The ECB decided to implement a program to prevent fragmentation, i.e. significant differentiation of bond interest rates between countries. This will help reduce debt service costs by countries perceived as more exposed to the risk of recession and its consequences. In the euro area, Germany is currently paying the least for its bonds - 1,29 per cent, and the most, plunged in another political crisis, Italians - 3,69 per cent.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.