ECB Raises Key Interest Rate for First Time Since 2023, Countering Inflation from Oil Price Shock

Background: Oil Price Shock and Rising Inflation

The backdrop to the decision is a significant rise in consumer prices. "Der Ölpreisschock infolge des Iran-Kriegs treibt die Verbraucherpreise nach oben", the statement said. Inflation in the eurozone surged to more than ten percent. In May, consumer prices in the eurozone were 3.2 percent above the level of the same month the previous year, according to initial official figures. Back in January – before the war began – inflation in the eurozone stood at 1.7 percent.

With the rate move, the European Central Bank is pushing back against the inflationary surge resulting from the Iran war. Higher interest rates make loans more expensive for consumers and companies, which can dampen demand and thereby curb inflation. The rate decision had been anticipated by analysts beforehand. Some economists expect that there will not be just one rate hike this year.

Effects on the Economy and Economic Activity

At the same time, rate increases are a burden on the already weak economy. The ECB pursues the goal of achieving price stability at two percent inflation in the eurozone over the medium term. ECB President Christine Lagarde had repeatedly emphasized the central bank's ability to act.

What Savers Can Expect

Savers benefit when banks pass on rising key interest rates. According to the comparison portal Verivox, nationally available fixed-term deposits with a two-year term currently yield an average of just over 2.3 percent, while overnight deposits offer 1.3 percent. Some banks are temporarily luring new customers with up to 4 percent on overnight deposits. "In dem Fall dürfte sich der Zinsanstieg beim Festgeld in ähnlichem Tempo wie zuletzt fortsetzen", says Oliver Maier, Managing Director of Verivox Finanzvergleich GmbH. Verivox expects that conditions for savers will continue to improve as key interest rates rise.

The impact on inflation in Germany is already visible: food is around one-third more expensive than in 2019, and the fuel discount provided some relief in May, bringing inflation down to 2.6 percent. After the start of the Russian war against Ukraine in February 2022, prices also rose significantly; now the new oil price shock is overlaying these developments.