EU Interest rate rises as economy tanks

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Here in the UK it’s been hard to avoid the news of roaring inflation and rising interest rates. The economy is not in a good place and while there is some Brexit effect, that’s pretty much dwarfed by the tail of the pandemic and the war in Ukraine. With gas, electric and petrol prices soaring, there’s little that can be done to stem inflation and it will only be when these prices stabilise that inflation will come back down. It’s easy to think that it’s only the UK that’s impacted, but the European Central Bank (ECB) just raised the EU interest rate by 0.5% and that’s significant.

The ECB EU interest rate hasn’t risen for 11 years and since 2012 it’s actually been 0%. During the pandemic it was lowered further in 0.1% increments until it hit a low of -0.5%. Yes, that meant they would actually charge banks that deposited. This was the ECB attempting to stimulate the economy by making it more attractive for banks to lend and the strategy was a result of many years of weak growth.

Raising the EU interest rate half a percent to 0% is a reaction to inflation in the EU which is running around 8.6% – slightly lower than here in the UK but still high enough that it’s impacting consumers pockets and they will be facing many of the same challenges with their domestic budgets as we are in the UK. The EU has the same 2% inflation target as the UK the EU interest rate hike probably won’t be the last we see in the coming months.

It’s often been easy, especially pre-Brexit, to look at the EU as a cash cow for sales for growing businesses, but for the immediate future consumer’s discretionary spend in the EU is likely to be as constrained for many as it is in the UK. When you need to feed your family, run your car and heat your home and prices are rising significantly across the board tough choices have to be made and our EU friends are facing the same challenges as consumers in the UK.

Not good news for retailers in general, but as is always the case while some, particularly low earners, are seriously struggling financially, for those with money to spend it’s a great time for smaller brands to gain headway as consumers are more price conscious and willing to explore alternatives if there is a price advantage.

The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% respectively, with effect from 27 July 2022.

At the Governing Council’s upcoming meetings, further normalisation of interest rates will be appropriate. The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions. The Governing Council’s future policy rate path will continue to be data-dependent and will help to deliver on its 2% inflation target over the medium term.

– Governing Council, European Central Bank


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