The European Central Bank (ECB) has gone ahead with its plan to raise interest rates by 50 basis points, in spite of the recent market turmoil caused by the collapse of Silicon Valley Bank (SVB) in the United States. The bank, which serves 20 countries that share the euro, has been increasing rates at a record pace to tackle inflation, which is projected to overshoot its 2% target through 2025. The ECB has lifted its deposit rate to 3%, its highest level since late 2008. However, the bank offered no commitments for the future, despite calls from policymakers for more big moves in the fight against inflation. The central bank stated that the importance of a data-dependent approach to its policy rate decisions is reinforced by the elevated level of uncertainty.
The ECB’s primary responsibility is to fight inflation, and its projections show that price growth will exceed its 2% target through 2025. Inflation is expected to average 5.3% this year, 2.9% in 2024, and 2.1% in 2025. The ECB stated that it is monitoring current market tensions closely and is ready to respond as necessary to preserve price and financial stability in the euro area.
Despite the recent market turmoil, the ECB has decided to go ahead with the rate hike as it believes that it has sufficient instruments to fight market stress. The bank has not needed to sacrifice the rate move to keep financial assets buoyant. The key concern for the ECB is that monetary policy works via the banking system, and a full-blown financial crisis would make its policy ineffective. Eurozone bank shares have been in freefall this week, spooked first by SVB’s collapse, then by a plunge in the value of Credit Suisse, a lender that has long been dogged by problems. However, the Swiss National Bank has thrown Credit Suisse a $54 billion lifeline overnight, a big enough show of force to send its shares back up more than 20% and lift other bank stocks.
Investors are now focusing on ECB President Christine Lagarde’s news conference, where she is expected to be quizzed on future policy moves and the risk of contagion in the banking sector. She will attempt to reassure investors about the health of the bloc’s banks and say that a raft of ECB liquidity facilities remains available in case of need. However, she is likely to stop short of offering specific measures to help banks, especially since the ECB has just removed a subsidy from a key long-term lending instrument in an attempt to wean lenders off central bank cash.
