The European Central Bank raised interest rates by half a percentage point, sticking to its goal of fighting inflation despite financial turmoil caused by US bank failures and concerns about Credit Suisse.
The ECB’s decision to raise its benchmark deposit rate to 3 percent from 2.5 percent was in line with what it had been signaling since last week. However, rate-setters have dropped their commitment to “substantially raising interest rates at a steady pace” since the last policy statement, indicating they are unsure of how much they will raise borrowing costs.
The central bank also cut its inflation forecast, but said price pressures were still “projected to remain very high for a very long time”.
The euro initially fell 0.2 percent to $1.055 against the dollar, but then rebounded.
Plans for a half-point increase have been thrown into doubt by recent panic in the banking sector, which some observers believe should persuade the central bank to hold back or raise borrowing costs by a small amount.
Pledging to adopt a “data-driven” approach to future decisions, the ECB said it was “closely monitoring current market tensions and stands ready to respond as necessary to maintain price stability and financial stability”.
Meeting as the first major central bank since the collapse of Silicon Valley Bank and Signature Bank last week, which cast doubt on the stability of the global financial system, the ECB’s decision will be read as an early test of policymakers’ appetite to keep raising rates. Stress on banks.
The US Federal Reserve and the Bank of England are due to meet with analysts next week to discuss whether they will continue to raise rates or take a wait-and-see approach as turmoil in the banking sector develops.
Shares in Credit Suisse and other European banks pared some earlier losses on Thursday after Switzerland’s second-biggest lender said it would borrow up to SFr50bn ($54bn) from the Swiss central bank and buy back SFr3bn of its debt in a boost effort. Liquidity and calm investors.
The ECB said eurozone banks were “resilient with strong capital and liquidity positions”, while emphasizing tools to “provide liquidity support” if needed.
The central bank cut its inflation forecast for this year to 5.3 percent from 6.3 percent expected in December and to 2.9 percent for next year from 3.4 percent.
It predicted that price growth in 2025 would also be slightly lower than expected but would remain at 2.1 percent, below its 2 percent target. Core inflation, a measure that excludes energy and food prices, will be higher than expected at 4.6 percent this year, indicating that more policy tightening may be needed.
The forecasts do not include the impact of the recent banking crisis, which analysts believe could reduce the need for the ECB to raise rates by making lenders more conservative, reducing credit supply and cooling price pressures.
Economists said the recent chaos in the US and European banking sectors means central banks are entering a new phase in their efforts to curb decades of high inflation and must now balance monetary tightening with measures to maintain financial stability.
Krishna Guha, head of policy and central bank strategy at US investment bank Evercore ISI, said rate-setters will have to show they can “walk and chew gum at the same time – addressing financial stability concerns with financial stability tools while keeping rates Uses rates to control inflation and thus avoid monetary dominance”.
Sandra Flippen, chief economist at Dutch bank ABN AMRO, said that until last week equity investors were assuming “everything was fine and goldilocks”. “We are now waking up to the fact that historical inflation and historical hiking trails for more than a year are not low risk but high risk environments and yes, incidents do happen in such environments.”
Jack Allen-Reynolds, an economist at research group Capital Economics, said the ECB had chosen “the riskiest of the options available”, adding that “there is still a lot of uncertainty about whether other banks will be caught in the storm”.
Thursday’s decision means the ECB has raised its benchmark rate by 3.5 percentage points since last summer – an unprecedented tightening of policy – as it tries to bring down eurozone inflation from 8.5 percent in February to its 2 percent target.
Additional reporting by George Steer