European Central Bank Increases Interest Rates As Planned In spite Of The Financial Crisis

The European Central Bank (ECB) ignored investor pleas to pause policy tightening at least until mood stabilizes and increased interest rates by 50 basis points on Thursday as planned, despite mayhem on the financial markets.

The European Central Bank (ECB) has been raising interest rates at their quickest rate ever to combat inflation, but a market crash on a worldwide scale following the failure of Silicon Valley Bank (SVB) in the US last week had threatened to overturn these plans at the last minute.

The central bank for the 20 nations that use the euro increased its deposit rate to 3%, the highest level since late 2008, in accordance with its oft-repeated guidance, as inflation is anticipated to exceed its objective of 2% until 2025.

Although a long list of policymakers had previously called for more significant actions to be taken in the battle against inflation, it made no future commitments.

“The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions,” the ECB said.

After days of market turbulence, financial investors had projected a 50% likelihood of a modest, 25 basis point rise by the ECB on Thursday morning. They have also lowered expectations for upcoming developments, projecting a peak rate of 3.25 percent, which is lower than the 4. percent priced last week.

The collapse of SVB and the subsequent decline in the value of Credit Suisse, a company that has long been plagued by issues, sent euro zone bank shares into free fall this week.

But, Credit Suisse was given a €50 billion lifeline by the Swiss National Bank last night, which was a significant enough show of force to propel its shares back up by more than 20% and boost other bank equities.

Since monetary policy is carried out by the banking sector, the ECB’s main concern is that its strategy would become ineffective in the event of a severe financial crisis. As a result, the ECB was forced to choose between upholding financial stability in the face of largely imported turbulence and fulfilling its responsibility to combat inflation.

The ECB’s main concern, inflation, is significantly higher than in prior crises, and new predictions released on Thursday by the ECB show that price increases would continue to exceed its 2% target until 2025.

The ECB stated that inflation is expected to average 5.3% this year, 2.9% in 2024, and 2.1% in 2025, emphasizing that these predictions were made before the current upheaval.

“The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” the ECB said.

While prolonged recessions frequently result from systemic banking crises, the financial sector in the euro zone is in better form than it has been in years, with strong levels of capital, liquidity, and earnings.

Other analysts however asserted that the ECB had a variety of tools at its disposal to combat market stress and had not required to forgo the rate hike in order to maintain the buoyancy of financial assets. Market focus now shifts to ECB President Christine Lagarde’s press conference, where she will face questions about potential policy changes and the threat of a banking sector contagion.

She will make an effort to assuage investors’ concerns about the stability of the banks in the bloc and reassure them that a variety of ECB liquidity facilities are still available in the event of a crisis.