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When a central bank raises interest rates, the immediate effect is that borrowing becomes more expensive across an economy: mortgages, corporate loans, and government financing all cost more to service.
The European Central Bank took that step, lifting its benchmark rate to 2.5%, with policymakers citing rising prices, the consequences of the U.S.-Iran war, and surging government borrowing costs as the forces behind the decision.
The short version of the choice is this. The ECB sees inflation heading higher, and the standard tool for cooling prices is to make credit costlier.
When borrowing becomes expensive, consumers and businesses tend to spend less, which in theory eases upward pressure on prices. What complicates the picture is the simultaneous warning about weaker growth.
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