European Central Bank hikes rate ahead of 'resilient' Eurozone
European Central Bank President Christine Lagarde is unable to comment on possible rate hikes in the future. (File photo)
The European Central Bank (ECB) was not panicked by the risk of a new banking crisis and decided on Thursday to another half-percentage-point rate hike to fight inflation, saying eurozone banks were strong and “resilient”.
The guardians of the euro, however, are cautious about the continuation of monetary tightening and have abandoned their commitment to raise rates significantly further in the coming months.
There is no x27; is not possible to determine at this stage what will be the way forward on rates, acknowledged ECB President Christine Lagarde, as the rout of Silicon Valley Bank (SVB) in the United States and concerns around Credit Suisse have been shaking the markets for a week.
The first major central bank to make a decision since the start of the stock market turmoil, the ECB engaged in a veritable balancing act ensuring that there was no compromise to be made, nor on financial or price stability.
This firmness somewhat reassured the European stock exchanges which closed higher: Paris gained 2.03%, Frankfurt 1.57%, Milan 1.38% and London 0.89%, gains however lower than their losses of the day before.
The bankruptcy of the Silicon Valley Bank in the United United rekindles fears about the soundness of the US banking system. (File photo)
Since last Friday, the bankruptcy of the SVB and two other American regional banks has raised the specter of the 2008 financial crisis which had destabilized the world economy.
Wednesday, it was the Swiss giant Crédit Suisse which suffered the worst session in its history on the stock market after a movement of panic linked to doubts about its solidity.
But the banking sector is currently in a much stronger position than in 2008, assured Christine Lagarde to the press, adding that the ECB would act if necessary.
Faced with soaring prices in the wake of the Russian invasion of Ukraine, the ECB began an unprecedented cycle of rate hikes in July, in addition to putting an end to its policy of buying bonds on the markets in order to curb demand.
Any decision other than a 50 basis point hike, announced as soon as February, would have been seen as a volte-face and an attack on the credibility of the ECB, believe several analysts.
ECB interest rates are now in a range between 3% and 3.75%, the highest since October 2008.
Future monetary decisions will depend on financial and economic data of the moment, repeatedly hammered the first guardian of the euro.
US Federal Reserve Chairman Jerome Powell.
In the United States, the US Federal Reserve will face a similar dilemma next week at its next rate meeting.
Rate hikes are a double-edged sword for commercial banks: on the one hand their new loans earn more interest, on the other hand their assets on the balance sheet may suffer, with the risk of falling. #x27;increased non-payment among the most fragile borrowers and a mechanical fall in bond prices in the portfolio, which was fatal for SVB.
The institution of Frankfurt also took into account the lull in the stock markets after efforts on both sides of the Atlantic to restore investor confidence in the banking sector.
American media reported Thursday on the possible intervention of large American banks to help the regional establishment First Republic, another bank weakened in recent days. This assumption made the New York Stock Exchange rebound.
European markets were also reassured by Credit Suisse's announcement that it would call on the Swiss central bank to borrow up to 50 billion Swiss francs (about 73.9 billion Canadian dollars). ). The title of Credit Suisse managed to regain more than 19% on Thursday.
The ECB is not done with its monetary tightening, because inflation should remain too high for too long, warned Lagarde.
Eurozone inflation fell in February for the fourth month in a row, to 8. 5% year-on-year, but so-called core inflation, excluding energy and food, climbed to a record high of 5.6%.
In its newly released forecast Thursday, inflation is expected at 5.3% in 2023 – against 6.3% in December – then 2.9% in 2024 and 2.1% in 2025, very close to the target of 2 %, suggesting that the ECB may opt for less steep rate hikes in the coming months.
Today's decisions could mark the start of the final phase of the ECB's tightening cycle, comments Carsten Brzeski, economist at ING.
