ECB hikes interest rates by half a point despite banking turmoil

Despite broader fears that a policy of raising interest rates to fight inflation could lead to Credit Suissethe ECB Governing Council decided to raise interest rates by half a point, to 3% and 3.5%.

In particular, the base interest rate of the bank (deposits) is now set at 3%, and for refinancing operations – at 3.5%.

“We were absolutely confident that this 50 basis point rate hike was a strong decision given the situation to be covered,” ECB President Christine Lagarde said at a press conference after the central bank’s board meeting.

The President of the ECB said that during the financial crisis, banks “are in a completely different position than in 2008.”

“Crisis are never the same,” said Ms. Lagarde, “but the architecture of our banking system, the structure in which they operate, the oversight applied to the banking system, have improved significantly.”

ECB Vice President Luis de Guidos echoed Laggard’s words, saying at a press conference that European banks’ exposure to the risk that led Credit Suisse to bankruptcy was “rather limited”. “Banks are resilient, high capital ratios, strong liquidity buffers, limited exposure to US institutions in this case and at the same time the overall assessment was quite clear – the banking sector in Europe is resilient,” the ECB vice president emphasized.

“We are closely monitoring the current market tensions and are ready to respond as necessary to maintain price stability and financial stability in the euro area.

In any case, we are ready to adjust all our instruments within our mandate to ensure that inflation returns to our medium-term target and to keep the monetary policy transmission functioning smoothly,” the head of the ECB stressed. “We are determined to return inflation to 2% in the medium term, there should be no doubt about this, the determination is unchanged,” he said.

The Board of Governors, in a statement, says it is ready to adjust all instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to ensure the smooth functioning of the monetary policy transmission.

The ECB policy toolkit has all the tools to provide liquidity to the eurozone’s financial system if necessary, the report said.

The Governing Council of the ECB notes that this decision was dictated mainly by the fact that inflation is projected to remain too high for too longas inflation is estimated to average 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025, according to revised ECB forecasts that do not take into account any impact of the recent financial crisis. the same time, it is estimated that price pressure remains strong.

In February, inflation, excluding energy and food prices, which are at very high levels, continued to rise in line with revised forecasts and is estimated to average 4.6% in 2023, higher than expected in December .

It is projected to fall to 2.5% in 2024 and 2.2% in 2025 as upward pressure from previous supply shocks and economic reopening eases and monetary tightening further dampens demand.

Under revised forecasts, the ECB expects growth to pick up further to 1.6% in both 2024 and 2025, supported by a strong labor market, improved confidence and a recovery in real incomes. However, the recovery in both 2024 and 2025 will be weaker than forecast in December due to monetary tightening.

Some EU banks could be vulnerable to rising interest rates, ECB Vice President Luis de Guindos told finance ministers on Tuesday https://t.co/TRE17iK7aT

— Bloomberg Markets (@markets) March 16, 2023

And while the ECB vice president officially assured today that the risks of European banks are limited, according to Bloomberg, he told finance ministers yesterday during an Ecofin meeting that some banks in the European Union could be vulnerable to financial pressure due to interest rate hikes.

Analyzing the state of the financial sector after the crash Silicon Valley BankLuis de Guidos said lenders (banks) in the region are far less vulnerable than their US counterparts, according to people familiar with the talks. However, de Guidos said the ECB could not rule out that some lenders could be at risk due to their business models, according to sources cited by the financial agency. He warned against complacency and that a lack of confidence could spread the crisis.

An ECB spokesman declined to comment.

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