With effect from Wednesday of last week, the European Central Bank raised the interest rate it pays on deposits to 4%. This is the highest it has been since the common currency, currently in 20 countries, was introduced on January 1, 1999 (at that time it was just 12 countries) and then launched on January 1, 2002. This was the 10th increase in a 14-month period, in the ECB’s fight to control inflation.

Will this increase be its last? Will we ever go back to zero interest rates? These are all questions that concern us directly. Although decisions concerning interest rates are very complex and very technical in nature, their impact on our daily life can be very significant.

An increase in interest rates affects our purchasing power, serves as an incentive to save, may slow down consumption, may serve as a disincentive for investment. It has an impact on our national debt, which therefore impacts government income and expenditure.

So going back to the first question, will this be the last increase? The ECB has been caught between a rock and a hard place. Inflation is still not under control and is expected to come back down to the 2% target slower than initially expected. This would tend to justify further increases in interest rates.

On the other hand, with high borrowing costs and a difficult international economic situation, the ECB has cut down its forecast for economic growth.

The behaviour in financial markets tends to suggest that the rate increase last week could be the last as bond yields fell and the value of European equities rose. However, experience has taught us that financial markets can be very fickle in their volatility, as operators seek to make short-term gains.

Trust in certain national and international economic institutions has diminished greatly around the world; therefore, a totally new approach to fiscal and monetary policy may be required

ECB president Christine Lagarde did not rule out explicitly any further increase, and the Governing Council is expecting that, if it maintains the interest rate at the high level it is at today for a sufficiently long period of time, inflation will eventually get to around 2% in a couple of years. What is clear is that the ECB does not wish to deepen the economic slowdown in the eurozone any further.

There was the second question. Will interest rates ever go back to zero? If that question was asked just two years ago, analysts would have said that interest rates were likely to remain low indefinitely. There appeared to be consensus that low interest rates were here to stay. The probability of interest rates rising to above 4% in the eurozone within five years was put at 4%. We had negative real interest rates till late last year.

This has now changed as real interest rates have moved into positive territory. The US avoided going into recession, even though it was expected to. This has led analysts to believe that it is highly unlikely that nominal interest rates will go back towards zero in the foreseeable future. What may happen is that real interest rates would actually hover around 0%. This would make it even more essential for governments and central banks to control price inflation.

Such a scenario would take us back to where we were pre-2008, that is before the severe crisis in the international financial markets. However, the world is not the same as it was in 2007.

Trust in certain national and international economic institutions has diminished greatly around the world; therefore, a totally new approach to fiscal and monetary policy may be required.