Central bank interest rates in the European Union 2022-2023, by country
The central bank of Hungary set the key interest rate to 13 percent on the 28th of September, making it the highest central bank interest rate in the EU as of March 2023. Bulgaria had the lowest rate 2.17 percent, although the rate was increased regularly after September 2022.
Why do central bank interest rates increase?
Central bank interest rate, or central bank policy rate is the rate at which banks borrow from and lend to each other. It is set by central banks and used as a primary tool to maintain stability in a country's financial system. In times of inflation, higher interest rates are a policy response to rising inflation. Higher rates make borrowing more expensive and encourage saving. When debt is more expensive, this in turn can influence consumer demand for goods and services, as well as business investments. This can help to slow down inflation when demand exceeds supply. This is why interest rates tend to move in the same direction as inflation but with a short delay.
Inflation and interest rate in the United States
Monthly inflation rate in the United States started to increase drastically after May 2020, just a few months ahead of the sharp rise of inflation rate in the EU, and it kept rising until June 2022. Despite the rising inflation, federal funds effective rate in the United States remained relatively low until February 2022. After February 2022, the federal funds effective rate increased sharply.