ECB hikes interest rates

The European Central Bank raised its key interest rate as expected by a quarter of a percentage point to 4.25 percent on Thursday to combat surging inflation in Germany and the rest of the euro zone.

ECB hikes interest rates
Trichet nudges rates higher. Photo: DPA

It is the first time that the Frankfurt-based ECB has hiked borrowing costs since June 2007. Economists had been expecting Europe’s central bankers to raise rates in the face of record inflation in several euro-area members. ECB President Jean-Claude Trichet made clear in June that the bank was more worried about high energy and food prices than the damping effect higher interest rates might have on the euro-zone economy.

“Today’s decision will help monetary policy achieve the goal of price stability,” said Trichet at a press conference in Frankfurt, adding that Thursday’s increase did not mean there would be more on the way. “Our course isn’t predetermined. We will do what’s necessary in order to preserve purchasing power. The citizens can depend on us.”

Euro-zone inflation hit a record 4.0 percent annual rate in June – the highest it’s been since the ECB took over monetary policy for 12 EU nations in 1999. But several leading European politicians – in particular French President Nicolas Sarkozy and German Finance Minister Peer Steinbrück – have criticized the central bank for putting fighting inflation over spurring growth.

But Jürgen Thumann, the president of the (BDI) Federation of German Industry, welcomed the rate hike in light of surging inflation. “The European Central Bank’s decision might be uncomfortable, but it’s necessary and the right thing to do,” he said.



German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.