European Central Bank (ECB) President Christine Lagarde pauses during an interest rate decision press conference in Frankfurt, Germany, Thursday, March 16, 2022.
Alex Krause | Bloomberg | Bloomberg | Getty Images
The European Central Bank on Thursday announced another rate hike of 50 basis points, signaling its readiness to provide liquidity to banks if needed amid the recent turmoil in the banking sector.
For weeks, the ECB has hinted at another rate hike at its March meeting as inflation across its 20 member economies remains well above target levels. Preliminary data for February showed headline inflation at 8.5%, well above the central bank’s target of 2%.
Some market observers have questioned whether President Christine Lagarde will continue the move following the recent banking sector shock. credit suisse Stocks fell as much as 30% in Wednesday’s intraday trading, with the banking sector as a whole ending Wednesday’s session down about 7%.
“Inflation is expected to continue for too long. Therefore, the Governing Council today decided to raise the ECB’s three main interest rates by 50 basis points,” the ECB said in a statement.
This latest move brings the bank’s key interest rate to 3%. It was in negative territory until July last year.
“The Board is closely monitoring current market tensions and stands ready to act as necessary to maintain price stability and financial stability in the euro area. It has a strong capital and liquidity position and is resilient,” the central bank said. same statement.
The first pressure on the banking sector appeared last week as US authorities declared Silicon Valley Bank insolvent. The event led to the collapse of the bank’s international subsidiaries and raised concerns that the central bank was raising interest rates at an aggressive pace. Goldman Sachs has quickly adjusted its interest rate forecasts ahead of next week’s meeting of the Federal Reserve. Previously he expected a rate hike of 50 basis points, now he expects a rise of 25 basis points.
European officials were keen to emphasize that the situation in Europe differs from that in the United States. Overall, deposits are less concentrated — SVB has been a key lender to the tech and healthcare sectors — deposit flows appear to be stable, with European banks struggling to cope with the global financial crisis. It is well capitalized since subsequent regulatory reforms.
Thursday’s stock action showed some relief across the banking sector after Credit Suisse announced it would borrow up to $54 billion from the Swiss National Bank.
“I was in 2008”
Lagarde emphasized that the recent market turmoil is different from what happened during the 2008 global financial crisis.
“Given the reforms that have been made, I was in 2008 and I remember clearly what happened and what had to be done. I agree with you. [a regulatory framework]we have increased our capital ratios … the banking sector is now in a much stronger position,” Lagarde said at a press conference.
“On top of that, we also have a toolbox with tools and other equipment that is ready to be activated at any time if needed, with tools and facilities available,” she said. I reiterated that I was ready to intervene if necessary.
determination to curb inflation
The ECB on Thursday also revised its inflation expectations. Headline inflation is now expected to hit 5.3% this year and 2.9% in 2024. In December, inflation was forecast to be 6.3% in 2023 and 3.4% in 2024.
Lagarde said the ECB remains committed to curbing inflation.
“We are determined to bring inflation back to 2% over the medium term, and there is no doubt about it, and that determination is intact,” she said.
An open question remains: How quickly will the ECB proceed with further rate hikes? followed the same movement.
Lagarde did not offer any suggestions for future decisions.
“We know we have a lot more to cover, but if our baseline persists, that’s a big caveat.
