Christine Lagarde, president of the European Central Bank (ECB), takes a break during a press conference on the rate decision in Frankfurt, Germany, Thursday, March 16, 2022.
Alex Kraus | Bloomberg | Getty Images
On Thursday, the European Central Bank announced a further rate hike of 50 basis points, signaling that it is ready to provide liquidity to banks if needed amid the recent turmoil in the banking sector.
The ECB has signaled for weeks that it will raise rates again at its March meeting as inflation in the 20-member region remains sharply above targets. In February, preliminary data put core inflation at 8.5%, well above the central bank’s 2% target.
Some market players questioned whether President Christine Lagarde would still go ahead with the move given the recent turmoil in the banking sector. Swiss loan Shares fell as much as 30% in midday trading on Wednesday, while the entire banking sector was down about 7% on Wednesday’s session.
“Inflation is expected to remain too high for too long. Therefore, the Governing Council decided today to increase the ECB’s three main interest rates by 50 basis points,” the ECB said in a statement. One basis point is equal to 0.01%.
This latest move will bring the bank’s prime rate to 3%. It was in negative territory until July of last year.
“The Governing Council is closely monitoring current market tensions and stands ready to respond as necessary to maintain price stability and financial stability in the euro area. The euro area banking sector is stable with strong capital and liquidity positions,” the central bank said. same statement.
The first pressures on the banking sector came last week when US authorities declared a Silicon Valley bank insolvent. The incident rattled the bank’s international subsidiaries and raised concerns that central banks were raising rates at too aggressive a pace. Goldman Sachs quickly adjusted its rate expectations for the Federal Reserve due to meet next week — the bank now expects a 25 basis point hike, after previously forecasting a 50 basis point hike.
European officials stressed that the situation in Europe is different from that in the United States. Overall, deposits are less concentrated—SVB has been a significant lender to the technology and healthcare sectors—deposit flows appear stable, and European banks are well capitalized following regulatory transformation following the global financial crisis.
Equities showed some relief in the banking sector on Thursday after Credit Suisse said it would borrow up to $54 billion from the Swiss National Bank.
“I was there in 2008”
President Lagarde emphasized that the recent turmoil in the market is different from what happened during the global financial crisis of 2008.
“Given the reforms, I was there in 2008, so I remember exactly what happened and what we had to do, we reformed the base, we agreed on Basel III. [a regulatory framework]we have increased capital ratios…the banking sector is in a much stronger position at the moment,” Lagarde told a news conference.
“Furthermore, if needed, we have tools, we have tools available, and we also have a toolkit with other tools ready to activate if and when needed,” he said, reiterating that the central bank is ready to intervene if needed.
Determined to reduce inflation
On Thursday, the ECB revised its inflation expectations. It now sees average inflation of 5.3% this year, followed by 2.9% in 2024. In December, the bank predicted inflation rate of 6.3% in 2023 and 3.4% in 2024.
President Lagarde said that the ECB is ready to reduce inflation.
“We are determined to return inflation to 2% in the medium term, there should be no doubt about it, the definition remains unchanged,” he said.
An open question remains: How quickly will the ECB continue to raise rates further? Before the recent market volatility, expectations were for another 25 basis point increase in May, followed by the same move in June.
Lagarde gave no indication of future decisions.
“We know we still have a lot of ground to go, but if our baseline holds, that’s a big warning,” he said, noting that “the pace we take will depend entirely on the data.”