There are several key rates, but to put it simply, in one way or another, they correspond to what banks like ING, BNP Paribas Fortis or Belfius have to pay when they borrow money from the Central Bank European. The mission of the ECB is to manage the euro and ensure price stability. It can be compared to a kind of bank of banks. And for the moment, we cannot really say that the prices are very stable. By raising these rates, the ECB’s objective is to counter inflation, ie the rise in prices.
To understand the current context of hyperinflation, we need to go back a few years. “Since 2008, interest rates have been negative to stimulate the economy. In this way, banks have been able to give more credit to the population to stimulate demand”explains Bertrand Candelon, professor of economics at UCLouvain.
At one point, we didn’t have enough inflation, and that wasn’t good either. “It can have negative consequences on the economy, because if prices tend to fall, people may wait to buy. Central banks generally consider that 2% is ideal”explains Peter Vanden Houte, chief economist at ING. “But now, we are at 8.6% inflation in the Euro zone and 10% in Belgium”.
Several factors have led to this widespread price increase. “In January, we started to feel a tension on supply and demand. Consumer demand picked up faster than expected after the Covid while there were still supply problems”continues Bertrand Candelon.
Added to this is the war in Ukraine and rising energy prices. When the demand is greater than the supply, prices increase, this is inflation. Concretely, the objective is to do the opposite of what we experienced after 2008. We have to somehow constrain demand.
“By raising its key rates, the ECB hopes to make people and businesses borrow less money from banks. In this way, growth will slow down because businesses can raise prices less. The economy is slowing down”, explains Peter Vanden Houte. In the end, inflation slows down and this will be positive for the economy.