The European Central Bank (ECB) raised the policy rate by 0.5 percent for the first time in 11 years. This increase in the prime interest rate is higher than expected. With this, the ECB has now come in line with the US Federal Reserve and central banks of other major countries of the world, which have raised interest rates to control inflation.
This move of the central bank will make the loan costlier. This raises the question that the competition to increase the interest rate will not put the big economies in the grip of recession? Due to cheap loans, people spend more on food, fuel and other things.
The monetary policy review in September is likely to see a similar hike after the key interest rate hiked by half a percentage point for the 19 countries that use the euro currency.
The ECB said that the increase in the policy rate by 0.5 per cent is justified given the inflationary risk. This means that the interest rate in banks will now increase which was negative till now.
ECB President Christine Lagarde said, “Economic activity is slowing down. Russia’s attack on Ukraine has had an impact on growth. For these reasons, the outlook for the second half of 2022 and beyond is looking hazy.
