European Central Bank (ECB) President Christine Lagarde announces a new monetary policy decision.
Frederic Florin | AFP | Getty Images
The European Central Bank announced another 50 basis point rate hike on Thursday, signaling that it stands ready to provide liquidity to banks if needed, amid recent turmoil in the banking sector.
The ECB had signaled for several weeks that it would raise rates again at its March meeting, with inflation in the 20-member region remaining well above target. In February, preliminary data pointed to headline inflation of 8.5%, well above the central bank’s 2% target.
Some market participants have questioned whether President Christine Lagarde will pursue the move, given the recent shocks in the banking sector. Credit Suisse shares fell 30% in intraday trading on Wednesday, and the broader banking sector ended Wednesday’s session down about 7%.
“Inflation is expected to remain too high for too long. Therefore, the Governing Council decided today to raise the three main ECB interest rates by 50 basis points,” the ECB said in a statement. communicated.
This latest decision brings the bank’s key rate to 3%. It was in negative territory before July last year.
“The Governing Council is closely monitoring the current tensions in the markets and stands ready to react if necessary to preserve price stability and financial stability in the euro area. The banking sector in the euro area is resilient, with solid capital and liquidity positions,” the central bank said in the same statement.
The first pressures on the banking sector appeared last week, when US authorities declared Silicon Valley Bank insolvent. The event threw the bank’s international subsidiaries into meltdown and raised concerns about whether central banks were raising rates at a very aggressive pace. Goldman Sachs quickly adjusted its rate forecast for the Federal Reserve, which was due to meet next week – the bank now expects a 25 basis point hike, after previously forecasting a 50 basis point hike.
European officials were keen to point out that the situation in Europe is different from that in the United States. Overall there is less concentration of deposits – SVB was a major lender to the technology and healthcare sectors – deposit flows appear stable and European banks are well capitalized since the regulatory transformation following the global financial crisis.
Stock action on Thursday showed some relief in the banking sector, after Credit Suisse announced it would borrow up to $54 billion from the Swiss National Bank.
The ECB also revised its inflation expectations on Thursday. It now forecasts average headline inflation of 5.3% this year, followed by 2.9% in 2024. In December, the bank had forecast an inflation rate of 6.3% for 2023 and a rate of 3.4 % in 2024.