Central bank interest rates in the European Union 2022-2024, by country
Central bank interest rates increased in every European Union (EU) member state between January 2022 and May 2024, though most countries began lowering their rates toward the end of 2023. This rise in central bank rates is not unique to Europe, as policy rates also increased in other advanced and emerging economies.
In September 2023, Hungary's central bank set its key interest rate at 13 percent, the highest in the EU at the time. Despite regular rate cuts thereafter, Hungary still had the highest interest rate in the EU at 6.75 percent as of August 2024. With two cuts between May and August 2024, Sweden had the lowest rate at 3.5 percent.
Why do central bank interest rates increase?
The central bank interest rate, or policy rate, is the rate at which banks lend to and borrow from each other. Central banks set this rate as a primary tool to maintain financial stability. In times of inflation, central banks often raise interest rates to counter rising prices. Higher rates make borrowing more expensive and encourage saving, which can reduce consumer demand and slow business investments. This, in turn, can help cool inflation when demand outstrips supply. As a result, interest rates tend to rise in response to inflation, albeit with a slight delay.
Inflation and interest rates in the United States
In the United States, the monthly inflation rate began to surge in May 2020, a few months ahead of the sharp rise in inflation in the EU. Inflation continued to climb until June 2022. Despite this, the federal funds effective rate remained relatively low until February 2022, after which it rose sharply in response to the inflationary pressures.