Eurozone raises interest rates for first time in 11 years

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ECB president Christine LagardeImage source, Reuters

Image caption,

ECB president Christine Lagarde said a further rate rise was likely in September

The European Central Bank (ECB) has raised interest rates for the first time in more than 11 years as it tries to control soaring eurozone inflation.

The ECB raised its key interest rate by 0.5 percentage points to 0.0% on Thursday, and plans further increases later in the year.

The rate has been negative since 2014 to encourage banks to lend rather than deposit money with the bank.

Consumer prices rose at a record rate of 8.6% in the 12 months to June.

That is well above the bank’s 2% target.

Inflation is the pace at which prices are rising. For example, if a bottle of milk costs €1 and that rises by 5 cents compared with a year earlier, then milk inflation is 5%.

Central banks around the world, including the Bank of England and the US Federal Reserve, have been raising rates as prices accelerate.

The war in Ukraine and Covid have driven up energy, fuel and food costs, putting pressure on households and dragging on economic growth.

The European Union is vulnerable because it relies heavily on Russia for its oil and gas. This week it urged member states to begin rationing supplies amid fears Moscow will halt deliveries, causing shortages and further price rises.

The ECB began cutting interest rates after the 2008 financial crisis to stimulate growth, and took them as low as -0.5% during the pandemic.

However, earlier this year it signalled it planned to increase them again, although economists had only expected an increase of 0.25 percentage points in July.

The ECB said that further rate hikes “will be appropriate”, and said it would take a “meeting-by-meeting” approach to raising rates.

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