Consumer prices are rising, the current development: interest rate policy of the European Central Bank (ECB)

Central banks have the monetary policy tools at their disposal to counteract this: They could end the flood of money, increase key interest rates and thus reduce demand for credit and money creation. But as the graphic based on Bloomberg's shows, not all central banks are of the opinion that timely countermeasures are necessary. As a result, the European Central Bank (ECB) will probably maintain its low interest rate policy until the end of next year. This means that the central bankers are not impressed by the current high inflation. The aim of the ECB's monetary policy is to keep the inflation rate constant and at the two percent mark in the long term. For a transitional period, the inflation rate can also be above this mark. This means that the recent rise in consumer prices above the two percent target is not yet a reason for the ECB to intervene. ECB President Christine Lagarde believes that the measures to combat the corona pandemic have “led to a shortage of supply in certain sectors”. As soon as these effects subside, inflation would fall again.

Worries about the euro – Image: Stefan Dinse|Shutterstock.com

According to Bloomberg's forecast, interest rates should also remain stable in Australia, India, Japan and Switzerland. The US Federal Reserve will also keep the federal funds rate at the current level. The federal funds rate is the interest rate at which American financial institutions, such as banks and savings associations, lend money to each other to balance their reserve requirements at the central bank. other media reports , the Federal Reserve wants to reduce its asset purchases of $120 billion per month soon.

Other central banks, however, could end the era of very cheap money more quickly given rising inflation rates. This includes Great Britain. Bloomberg experts expect the bank rate to increase from 0.1 percent now to 0.25 percent at the end of 2022. The bank rate determines the interest rate that the Bank of England pays to commercial banks that hold money with the central bank. It influences the loan interest rates that banks charge their customers.

According to the forecast, interest rates will fall in Argentina, Turkey and China. China's economy is not facing high inflation but is forecast to face a number of downside risks, such as power shortages, virus outbreaks and weak consumption. The People's Bank of China is therefore likely to ease monetary policy and support the economy by pumping more liquidity into the banking system and cutting the reserve requirement ratio by 50 basis points in October or November 2022, according to Bloomberg. A shorter-term interest rate cut is unlikely because such a move would only fuel the financial imbalances that authorities are keen to curb. The monetary policy of Turkish President Erdogan is criticized by Bloomberg experts and described as “unorthodox”. In Turkey, consumer prices have risen by up to 19 percent, but Turkey's central bank recently significantly reduced the key interest rate and will do so again by the end of 2022, according to Bloomberg forecasts. Erdogan is obviously of the opinion that high interest rates would increase inflation and slow down economic growth. He wants to stimulate loans and investments through low interest rates.

Monetary policy is the economic policy measures that a central bank takes to achieve its goals. A restrictive monetary policy can aim to combat currency devaluation by having the respective central bank reduce the amount of money in circulation and increase interest rates. An expansionary monetary policy, on the other hand, increases the money supply or the central bank's money supply and is accompanied by falling interest rates.

What current development are you most concerned about when it comes to savings? – Image: Xpert.Digital

This statistic shows the results of a survey that shows Germans' biggest concerns when it comes to saving. At the time of the 2018 survey, the European Central Bank's interest rate policy was the biggest concern for the Germans surveyed when it came to saving. Around 32 percent of all mentions came from this area.

2018 Savings Concerns Survey

What current development are you most concerned about when it comes to savings?

Interest rates/monetary policy

• 2016 – 58 %
• 2017 – 53 %
• 2018 – 32 %

Euro/Europe

• 2016 – 5 %
• 2017 – 5 %
• 2018 – 6 %

Country

• 2016 – 3 %
• 2017 – 4 %
• 2018 – 5 %

Political situation

• 2016 – 3 %
• 2017 – 4 %
  2018 – 10 %

Business

• 2016  – 2 %
• 2017 – 2 %
• 2018 – 3 %

Miscellaneous

• 2016 – 3 %
• 2017 – 7 %
• 2018 – 6 %

Don't worry me

• 2016 – 26 %
• 2017 – 25 %
• 2018 – 39 %

The euro area is falling into deflation. This would mean that prices continuously fall instead of rising. Economists are afraid of this effect because it can discourage investment, thereby endangering growth and jobs. For this reason, the European Central Bank (ECB) has now lowered its key interest rate again - to 0.15 percent. The interest rate on bank deposits was even reduced to negative, to -0.1 percent.

The ECB hopes to boost inflation in the euro area again. The target is a value of around 2.0 percent. Most recently, a value of 0.5 was reported for the Eurozone, as our graphic shows. The problem: While countries like Greece are already in deflationary territory, others are still well above it. Higher inflation could cause problems here. Interest rate policy remains a balancing act.

2014: The Eurozone on the way to deflation – Image: Statista