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European Central Bank interest rate hikes may not help slow inflation

Euros. Source: Siim Lõvi/ERR

The European Central Bank (ECB) on Thursday announced its decision to increase its interest rates by half a percentage point, but this rate hike isn't going to significantly slow inflation in the euro area, SEB private banking strategist Peeter Koppel said.

Speaking to ERR on Thursday, Koppel was also skeptical whether the ECB's step will have any stabilizing impact on price increases in the Baltic region. "That would be an optimistic and positive scenario," he said. "I am of the opinion that in the context of our inflation, such an interest rate is paltry."

Of course it could also naturally be said that these are happy days for borrowers, he added.

"One of the most serious issues the euro area tends to face is the fact that countries with vastly differing productivity levels use the same currency, and that means that for some countries, money is too expensive, and for some countries, money is too cheap," the strategist explained. "I'm willing to wager that we're currently one of those countries for whom money is too cheap."

This results in high real estate prices and inflation continuing in other sectors of the Estonian economy, he noted.

Historically speaking, significantly higher interest rates have previously been needed to get inflation similar to current rates under control in the European context as well, Kopp said. Such rates can't currently be imposed, however, as that would put Southern Europe in a difficult economic situation, he added.

"This is an unpleasant situation with no good solutions and in which it's unfortunately likely that inflationary pressure may persist," Kopp said.

According to the strategist, the ECB may increase the base rate in September as well, but this time by 0.25 percentage points, not 0.50.

The Governing Council of the ECB decided to raise the three key ECB interest rates by 0.50 percentage points, the euro area's central bank announced Thursday.

Effective July 27, 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 percent, 0.75 percent and 0.00 percent, respectively.


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Editor: Aili Vahtla

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