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ECB rate rise comes as a shock, but it may be the first of many

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Christine Lagarde, president of the European Central Bank. Photo: Reuters/Wolfgang Rattay

Christine Lagarde, president of the European Central Bank. Photo: Reuters/Wolfgang Rattay

Christine Lagarde, president of the European Central Bank. Photo: Reuters/Wolfgang Rattay

If something cannot go on for ever, it has to stop. Logical though this may be, the ending of the era of cheap money will come as a shock to many.

The European Central Bank’s increase in interest rates across the eurozone, by half a percentage point, is an attempt to put the brakes on runaway inflation.

It is a stock economic reflex. However, the pain for those already in the eye of a perfect cost-of-living storm will be no less acute.

An increase had been expected, but until this week it was presumed it would be no more than 0.25pc. No wonder, then, that ending the eight-year experiment in Europe with negative rates came as such a jolt.

In a statement, the ECB said: “The front-loading 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.”

So there is every likelihood that more increases will follow.

This is especially tough for Ireland, where inflation is running at 9.1pc.

It is unlikely that banks here will waste much time before they too start moving rates upwards. Even as things stand, our rates are among the highest in the eurozone,

It is also abundantly clear that the undercurrents affecting many people’s lives will make it very difficult to absorb further financial stresses.

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For instance, Irish households are already caught in the biggest cost-of-living squeeze in nearly four decades. Central Statistics Office figures show prices here rose by 9.1pc in the 12 months to June.

The higher living costs were mostly caused by increases in energy, fuel and food bills. Electricity, gas and other fuels increased in price by 22.5pc year-on-year. The motivation behind the rises is to introduce a chilling effect on borrowing, which ultimately cuts spending.

The ECB may have had little choice, but a rate rise is a blunt instrument, especially when so many other shocks have to be managed by households.

Former US president Bill Clinton once said: “You know what higher interest rates mean? To you it means a higher mortgage payment, a higher car payment, a higher credit card payment. To our economy, it means business people will not borrow as much money, invest as much money, create as many new jobs, create as much wealth or raise as many raises.”

ECB president Christine Lagarde said yesterday: “The most precious good we can deliver – and we have to deliver – is to bring inflation down to 2pc in the medium term.” One wonders whether it is in the gift of the ECB to achieve just such an end.

Factors such as the war in Ukraine and the supply chain disruption caused by Covid are beyond its scope. Tánaiste Leo Varadkar recently raised eyebrows when he said: “A lot of people’s incomes will not rise as fast as the cost of living, and for them it will feel like a recession”.

That feeling can only have been intensified following the ECB’s move in Frankfurt.


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