Despite its dilemma the European Central Bank pushed ahead a large interest rise last Thursday amidst fears over the strength of the banking system after the heavy sell-off of the Swiss banking firm Credit Suisse the day before.
In fact, the ECB has been raising interest rates since last summer at a record pace to tackle high inflation across the eurozone. And it has in effect committed to another 0.5 percentage point increase in borrowing costs last week.
But the question raised now is how many increases can borrowers’ pockets afford?
The ECB’s primary objective is to reduce inflation to below 2% by 2025 and its head, Christine Lagarde, has stated that there is no ceiling on interest rates.
But there is a growing number of voices calling on the ECB to take into account the impact on the real economy caused by the increase in the cost of money. That is the risk of an increase in bad loans and a slowdown in the rate of credit expansion.
On the inflation front, the estimates are that its hard core, namely the accuracy of food prices, will not show any significant deceleration before this summer. Despite the fact that normality has returned to the energy cost part. This is because the cycle of increased production costs from the primary sector to industry will have to be completed.
In fact, some analysts have said the burden of financial costs, due to rising interest rates, will aggravate the situation and obviously delay the deceleration of inflation in food items.
This feedback situation is naturally causing concern at many levels with everyone now waiting for the reaction when the interest rate hike is passed on to the market.