REPORT: European Central Bank raised interest rates as promised by 50 basis points 

The European Central Bank raised interest rates as promised by 50 basis points on Thursday, sticking with its fight against inflation and facing down calls by some investors to hold back on policy tightening until turmoil in the banking sector eases.

A rout in global markets triggered by last week’s collapse of Silicon Valley Bank (SVB) and made worse by doubts around the future of Switzerland’s Credit Suisse had prompted some to question whether the ECB would pause its rate-hiking cycle.

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

While it said it was too early to predict future rate moves, the ECB rejected suggestions that its campaign to tame inflation was a threat to financial stability, arguing that euro zone banks were resilient and that if anything, the move to higher rates should bolster their margins.

“I think that the banking sector is currently in a much, much stronger position than where it was back in 2008,” ECB President Christine Lagarde told a news conference, citing improved capital and liquidity positions since the financial crisis of 15 years ago.

An ECB Governing Council statement said it was monitoring market tensions and would respond as necessary to preserve price stability and financial stability in the euro area.

But the statement offered no commitments for future rates, despite indications by many of its policymakers that more big moves would be needed in the fight against inflation.

“We know that if our baseline were to persist when the uncertainty reduces, then we have a lot more ground to cover,” Lagarde said, while noting it was impossible to determine the future path of rates amid “completely elevated” uncertainty stemming from the market ructions.

Lagarde set out what she called a “brand new” framing of the ECB’s decision process that would scan not just economic but also financial data, as well as gauging how inflation and its efforts to tame it were playing out in the real economy.

“The important bit is that financial and banking stress will be included as inputs into future decisions,” noted Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

The euro and bond yields edged up after the move, with bank shares hitting two-month lows before partially recovering. After days of turmoil in markets, financial investors had seen a 50% chance of a smaller, 25 basis point move by the ECB and dialled down expectations for future moves.

Lagarde said the ECB decision was adopted by “a very large majority” of its policy-makers.


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