On October 27, 2022, the European Central Bank (ECB) raised interest rates again by 0,75%. Over the past three months, key interest rates have already risen by 2%. This rate hike is unprecedented in the history of the ECB. The policy of the Central Bank of Europe is aimed at curbing the extremely high inflation that lowers the standard of living of the EU population. However, like any radical measures, a sharp increase in interest rates brings not only a positive effect - there are also significant risks for the economies of the eurozone countries.
Inflation caused by the energy crisis, the recovery of purchasing power after anti-COVID restrictions and the war in Ukraine has exceeded all expectations. In the Netherlands, it reached 17,1% in September, while the average for the eurozone countries is 9,9%.
An increase in the interest rate should lead to a decrease in inflation, as part of the funds will move from the consumer market to the banking sector. However, inflation can be expected to decrease only in 9-12 months; this economic measure does not bring an immediate effect.
Simultaneously with the decrease in inflation, the growth of interest rates also brings negative effects: a slowdown in the economy, a decrease or slowdown in GDP growth, and an increase in unemployment.
All types of interest rates in the euro area depend on the ECB rate. Based on it, rates on mortgage and other loans, interest on bonds and deposits in banks are formed. Dutch banks canceled negative interest rates back in July, since December it is planned to charge interest on deposits again (learn more about this from our article).
It should be noted that Dutch banks are not in a hurry to raise deposit rates. When placing their funds on the accounts of the ECB, Dutch banks receive significantly higher interest than they pay to depositors, but there are also objective reasons for this. Relying on the extremely low interest rates of the previous period, the banks of the Netherlands issued a lot of long-term mortgage loans at low interest rates. Now these loans are almost non-profitable, banks have low margins, so it is difficult for them to pay high interest on deposits. But an increase in the ECB interest rate should also lead to an increase in banks' rates on deposits and savings deposits.
Publication Date: 03.11.2022
