ECB raises rates as planned despite banking turmoil

The European Central Bank raised interest rates by 50 basis points on Thursday (Mar 16) as promised, ignoring financial market chaos and calls by investors to dial back policy tightening at least until sentiment stabilises.

The ECB has been raising rates at its fastest pace on record to curb inflation, but a rout in global markets since the collapse of Silicon Valley Bank in the United States last week had threatened to upend those plans at the last moment.

In line with its often-repeated guidance, the central bank for the 20 countries that share the euro lifted its deposit rate to 3 per cent, the highest level since late 2008, as inflation is seen overshooting its 2 per cent target through 2025.

ECB president Christine Lagarde said there was “no tradeoff” between price and financial stability, after the institution hiked rates again despite concerns about banking sector turmoil.

By implementing its latest increase of 50 basis points – despite calls to slow down in the face of market upheavals – the ECB was “demonstrating this, we are addressing the price stability issue,” she said at a news conference after the ECB announcement.

The move is “what we had intended, and because inflation is projected to remain way above our target and for too long,” she said.

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But the ECB offered no commitments for the future, despite previous calls by a long list of policymakers for more big moves in the fight against inflation.

“The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions,” the ECB said.

Lagarde said it’s “not possible to determine at this point in time” the future path for rates. “If the baseline as we have it was confirmed and was to persist, we would have more ground to cover.”

On Thursday morning, after days of turmoil in markets, financial investors had seen a 50 per cent chance of a smaller, 25 basis point move by the ECB. They have also dialled down expectations for future moves, forecasting the peak rate at 3.25 per cent, below the 4.1 per cent priced last week.

Euro zone bank shares have been in freefall this week, spooked first by SVB’s collapse, then a plunge in the value of Credit Suisse, a lender that has long been dogged by problem.

But the Swiss National Bank threw Credit Suisse a US$54 billion lifeline overnight, a big enough show of force to send its shares back up more than 20 per cent and lift other bank stocks.

The key worry for the ECB is that monetary policy works via the banking system, and a full blown financial crisis would make its policy ineffective.

That left the ECB in a dilemma, pitting its inflation-fighting mandate against the need to maintain financial stability in the face of overwhelmingly imported turmoil.

Inflation, the bank’s primary responsibility, is far higher than in previous crises and the ECB’s new projections, published on Thursday, put price growth above its 2 per cent target through 2025, an overriding concern for many ECB governors.

Inflation is seen averaging 5.3 per cent this year, 2.9 per cent in 2024 and 2.1 per cent in 2025, the ECB said, adding that these projections were finalised before the current turmoil.

“The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” the ECB said.

While systemic banking crises generally morph into deep recessions, the eurozone’s financial system is in its best shape in years, with capital, liquidity and profits all at healthy levels.

Some economists also argued that the ECB has plenty of instruments to fight market stress, and so had not needed to sacrifice the rate move to keep financial assets buoyant. REUTERS, afp, bloomberg