Loans in euros are becoming more expensive: the ECB raises interest rates, the currency

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The Governing Council of the European Central Bank (ECB) decided on Thursday to raise interest rates by 75 basis points, an unprecedented measure since the establishment of the single currency, to try to control ever-rising inflation, although such a move increases the likelihood of the zone entering euro in recession, notes Reuters.

The Governing Council decided to increase by 75 basis points the three representative interest rates of the ECB. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will increase to 1.25%, 1.50% and 0.75%, respectively, from 14 September 2022 .

The decision follows an increase of half a percentage point at the last meeting of the ECB, in July, the first increase in the last 11 years.

The ECB warns that interest rate hikes could continue in the coming meetings.

“The decision adopted by the Governing Council today, as well as the anticipation of further interest rate increases, are motivated by the fact that inflation remains at much too high levels and is likely to remain above target for a long period,” the ECB statement says .

The institution also notes that the very high prices of energy products reduce the purchasing power of the population’s income, and although supply bottlenecks are diminishing, they still limit economic activity. In addition, the unfavorable geopolitical situation, especially Russia’s unwarranted aggression against Ukraine, is affecting corporate and consumer confidence.

These outlooks are also reflected in the latest expert growth projections, which have been revised down considerably for the rest of the current year and up to the end of 2023. Experts currently expect economic growth of 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024.

In terms of inflation developments, the ECB has significantly revised its estimates upwards, with inflation expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.

Following the announcement, the single European currency rose and again outperformed the dollar after falling below $0.99 for the first time in 20 years at the beginning of the month.