Christine Lagarde, President of the European Central Bank (ECB), pauses during a press conference on the interest rate decision in Frankfurt, Germany on Thursday, March 16, 2022.
Alexander Kraus Bloomberg | Getty Images
The European Central Bank on Thursday announced a further 50 basis point hike in interest rates, signaling that it is ready to provide banks with liquidity if needed amid the recent turmoil in the banking sector.
The ECB had signaled for several weeks that it would hike rates again at its March meeting, as inflation is well above target levels across the 20-member region. In February, preliminary data showed headline inflation at 8.5%, well above the central bank’s target of 2%.
Some market participants questioned whether President Christine Lagarde would still take this step given the recent shocks in the banking sector. Swiss credit Shares fell as much as 30% in intraday trade on Wednesday, and the overall banking sector ended Wednesday’s session down about 7%.
“Inflation is likely to stay too high for too long. Therefore, the Governing Council decided today to raise the ECB’s three key interest rates by 50 basis points,” the ECB said in a statement. One basis point equals 0.01%.
This latest move brings the bank’s policy rate to 3%. It was in negative territory prior to July last year.
“The Governing Council is closely monitoring the current market tensions and stands ready to react as necessary to safeguard price and financial stability in the euro area. The euro area banking sector is resilient and has a strong capital and liquidity position,” the central bank said in the same statement.
The first pressure on the banking sector came last week when the US authorities declared Silicon Valley Bank insolvent. The event plunged the bank’s international subsidiaries into collapse and raised concerns that central banks were raising interest rates too aggressively. Goldman Sachs was quick to adjust its rate expectations for the Federal Reserve, which is 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 fond of pointing out that the situation in Europe was different from that in the United States. Overall there is less concentration of deposits – SVB has been a major lender to the tech and healthcare sectors – deposit flows appear to be stable and European banks are well capitalized since the regulatory reshuffle following the global financial crisis.
Equity measures on Thursday showed some relief across the banking sector after Credit Suisse announced it would borrow up to $54 billion from the Swiss National Bank, the country’s central bank.
“I was there in 2008”
Lagarde specifically emphasized that the recent market turmoil is different from what happened during the 2008 global financial crisis.
“Given the reforms that have taken place, and I was there in 2008, so I have a clear memory of what happened and what we had to do, we reformed the framework, we agreed on Basel III [a regulatory framework]we’ve increased capital ratios… the banking sector is in a much, much stronger position right now,” Lagarde said during a news conference.
“In addition, if necessary, we have the tools, we have the facilities available, and we also have a toolbox that also contains other instruments that we can activate at any time if necessary.” She added, repeating that the central bank is ready to intervene if necessary.
Determined to bring down inflation
The ECB also revised its inflation expectations on Thursday. It now sees headline inflation averaging 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% for 2024 .
Lagarde said the ECB remains committed to cutting inflation.
“We are determined to bring inflation back to 2% in the medium term, that should not be doubted, the determination is intact,” she said.
One open question remains: how quickly will the ECB proceed with further rate hikes? Up until the recent market instability, expectations were pointing to a further 25 basis point rise in May, followed by the same move in June.
Lagarde made no reference to future decisions.
“We know we have a lot more work to do, but it’s a big caveat if our baseline should hold,” she said, stressing that “the pace we’ll take will be entirely dependent on data.” “