Key interest rate
The key interest rate is the rate at which commercial banks can
borrow money from the European Central Bank (ECB) and invest it. It
thus affects the banks’ interest rates and the economy. By changing
the key interest rate, the ECB can influence critical economic
variables such as inflation, unemployment, economic growth, and the
external value of a currency.
Low key interest rates stimulate the economy, as companies can borrow capital cheaply for investment. This causes the demand for labor to rise. As a result, unemployment falls, and the wage level increases. Higher income, in turn, leads to higher demand for products and services. As demand increases but supply cannot be increased directly, prices also rise.
High-key interest rates have the opposite effect. To combat high inflation, the ECB raised the key interest rate by 0.5 percent on July 21, 2022.
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