The Governing Council of the ECB sets the key interest rates for the Eurozone:
- The interest rate on the main refinancing operations (MRO), which provide the bulk of liquidity to the banking system.
- The rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem.
- The rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem.
The ECB held its benchmark refinancing rate at 0 percent on December 14th 2017, and is expected to keep it at 0% during the year 2018, which some forecasts about starting raising the interest rate gradually from early 2019. Interest Rate in the Euro Area averaged 2.06 percent from 1998 until 2017, reaching an all- time high of 4.75 percent in October of 2000 and a record low of 0 percent in March of 2016. The benchmark interest rate is very important about the state of the economy, as the current and future monetary policy decisions affect the growth of the economy.
In times of high inflation and increased economic growth measured by the GDP, the central banks will increase the key interest rate to fight inflation. Low or zero interest rates are essential to help the economy expand but are not sustainable over time. Inflation is one of the key drivers of the interest rate decision of any central bank like the ECB, which has raised its forecast for the inflation for year 2018 to 1.4%, having a key target rate of 2.0%.
In the future if inflation in the Eurozone increases significantly and the economic expansion, which is observed lately continues then there are increased odds of a tighter monetary in the Eurozone, as the ECB will end the period of 0% interest rate increasing it gradually, which will be supportive and positive for the Euro.
