Interest rates in the Eurozone reach record levels

The European Central Bank (ECB) has raised interest rates in the eurozone to a record high. This is the 10th consecutive increase, bringing the key rate to 4% from 3.75%. The bank has justified this hike by warning that inflation is expected to remain high for an extended period. Forecasts have predicted that inflation, which measures the rate at which prices rise, will be, on average, 5.6% in 2023, leading to the decision to increase interest rates. However, the ECB has also hinted that this may be the final rate hike for now. The bank stated that the key interest rates have reached a level that, if maintained for a significant period, will contribute considerably to bringing inflation back to its target. The ECB expects inflation in the 20-nation bloc to decrease to approximately 2.9% next year and 2.2% in 2025. Like other parts of the world, the eurozone has been affected by rising food and energy prices, putting pressure on household budgets. Central banks worldwide have been raising interest rates in an effort to curb inflation. The rationale behind increasing rates is that by making borrowing money more expensive, people will have less disposable income to spend, resulting in reduced consumer spending and easing of price increases. However, it is a delicate balance, as raising rates too aggressively can lead to a recession. Currently, interest rates in the UK are higher than in the eurozone, standing at 5.25%. However, UK inflation is also higher, at 6.8%, and the Bank of England is expected to further raise rates next week. The ECB has expressed its determination to bring inflation down to its 2% target in a timely manner. However, policymakers have acknowledged that they have significantly lowered their economic growth projections for the eurozone due to the impact of higher interest rates. Revised data from Germany, the largest economy in Europe, has contributed to the economic downturn. A recession is typically defined as an economy contracting for two consecutive quarters. An economic downturn can be detrimental to businesses and result in job losses.