According to data, consumer price indexes in October 2022 increased as much as 10.7%, energy price index 41.9% and foodstuffs index 13.1% on an annually compared with October 2021. Moreover, recent data shows remarkable reduce of economic growth rate in the Eurozone. Thus, it is expected that during late 2022 and the first quarter of 2023 economy will experience a recession.

According to the ECB analysis, very high energy prices leads to reduction of people purchase power and economic activities will continue to face restriction in the light of supply shortages. In addition, unfavorable geopolitical situation, particularly Russian invasion of Ukraine cast its shadow over businesses’ as well as consumers’ trust.

The perspective has been reflected in the last employees’ predictions for economic growth rate which have been remarkably revised for the rest of 2022 and throughout 2023. Now, employees expect that economy will grow as much as 3.1% and .9% and 1.9% during 2022, 2023 and 2024 respectively.

In Davos annual meeting of 2022, there were serious concerns about non – cooperation to solve global problems. Statistics on rising foodstuffs prices throughout the world exacerbated those concerns. That’s why among the main topics of Davos meeting were Covid-19, climate change and war in Ukraine combined together helped skyrocketing prices of foodstuffs and energy.

The increased prices stood at nearly an average of 50% for some foodstuffs products basically from grains at global level. The Eurozone inflation statistics confirmed those concerns. Therefore, the ECB set the target of mid – term inflation at 2% and adopted policy to increase the interest rate.

Although reserves have been supplied to Europe to some extent and even in stock markets the prices plummeted but energy and foodstuff prices in the Europeans household consumer basket has risen; and the concern about the emergence of a stagnation in Europe is felt; particularly demands for wage increase intensifies the concern.

The ECB has developed all its policy instruments since the outbreak of financial crisis to influence the difficult situations when incorrect financial system hit the mechanism of monetary policy and thus, on financial conditions that people and enterprises face.

At such junctions, short term interest rates are driven towards “effective minimum boundary” i.e. to a level that any lower level will not lead to increase economic activity. The most important instruments of the ECB monetary policy are as follows:

– Granting central bank loan as required against deposit with fixed interest rate

– Applying negative interest rates to encourage banks to offer loans with low interest rate to enable people and enterprises to take inexpensive loans

– Offering long – term loans to banks including loans with very good interest rates provided that banks loan the money only to people and businesses

– Purchase of private and public financial assets

In fact, Governing Council of the ECB sets three different rates as follows:

– Interest rate for the main finance operations; under the operation, banks may take loan from the ECB against deposit on a weekly basis with a pre – determined rate.

– Interest rate based on deposit services; according to which banks may use it for overnight credit with a pre – determined rate which is less than main finance operation rate.

– Facility rate for final loan which offers overnight credit with a pre – determined interest rate and more than main finance operations given to banks.

Therefore, Governing Council of the ECB decided to raise three key interest rates to .75% for the second time to make it possible reach 2% target inflation rate. Although, the ECB has announced that there is still a possibility to further raise the interest rate during the up

coming sessions of its Governing Council in order to reduce demands and thus to prevent constant change of rising inflationary expectations.

On this basis, the policy procedure of the ECB is to take continuous feedback from the state of inflation and to formulate a course of policy making based on data received and inflation perspective. On this basis, as of September 14, 2022 the main refinance interest rate operation, facility interest rate for final loan and deposit facility raised to 1.25%, 1.50% and .75% respectively and the second raise also applied recently.