The European Central Bank (ECB) did not allow itself to be frightened by the specter of a new banking crisis and decided on Thursday March 16 for a new rate hike of half a point in order to fight inflation. “The euro area banking sector is resilient and has strong capital and liquidity positions”, she assures. The guardians of the euro, however, are cautious about the continuation of monetary tightening and have abandoned their commitment to raise further “substantially” rates in the coming months.
After the rout in the United States of Silicon Valley Bank (SVB), concerns around Credit Suisse could have completely reshuffled the cards for the Frankfurt institution engaged since this summer in an unprecedented monetary tightening. The ECB is the first major central bank to issue a monetary decision since the collapse of the SVB and two other US regional banks, which raised the specter of the 2008 financial crisis.
On Wednesday, the Swiss banking group Credit Suisse suffered the worst session in its history on the stock market after a panic linked to the statements of its largest shareholder, the Saudi National Bank. The share had reached its historically lowest price, at CHF 1.55. Challenged to fight persistent inflation without further destabilizing financial markets, the ECB held its monetary policy meeting in a context it had not imagined. Its interest rates are now in a range between 3% and 3.75%, the highest level since October 2008.
Credibility
“The ECB is staying the course (…) because any jump would have been interpreted as a weakness”analysis Jens-Oliver Niklasch, de la Landesbank Baden-Württemberg (LBBW).
Authorities and leaders on both sides of the Atlantic have made an onslaught of declarations minimizing the risk of contagion for the rest of the banking sector and the economy. US supervisors had appeased investors by promising to guarantee customers’ access to their money deposited with the California bank. European markets also picked up on Thursday morning after Credit Suisse announced that it was going to appeal to the Swiss Central Bank to borrow up to 50 billion Swiss francs (50.7 billion euros).
While a 50 basis point increase, the third in a row of this magnitude, was almost a given, since the ECB itself announced it last month, the scenario of a quarter point increase was no longer excluded by the markets. “Prudence dictates that we take a break [dans le resserrement monétaire] and that we resume hikes later, but the ECB may find that its credibility in the fight against inflation, already damaged, cannot afford it”insisted ING analysts before the meeting.
Lively discussion
Faced with soaring prices after the Russian offensive in Ukraine, the ECB began an unprecedented cycle of rate hikes in July, after a decade of cheap money. This forced monetary tightening, carried out by all the major central banks to increase the cost of credit and slow down the overheating of prices, has also contributed to weakening the commercial banks.
This is enough to revive the debate among central bankers in the euro zone, between “doves”preaching caution, and “hawks”, who want to stay the course of monetary tightening and will argue that there is no risk of contagion to the economy. Because the battle against rising prices is far from over. Inflation in the euro zone fell in February for the fourth month in a row, to 8.5% year on year, but so-called inflation “underlying”excluding energy and food, climbed to a record level of 5.6%.
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However, the ECB did not give any guidelines on its interest rate policy in the coming months on Thursday, abandoning its commitment to raise further “substantially” its rates in the coming months. “We still have a long way to go (…) our determination is intact”however, said Christine Lagarde, President of the ECB, referring to the objective of inflation at 2% in the medium term.
In its new forecast published on Thursday, the ECB estimates that the euro zone should experience lower inflation and stronger growth than expected in 2023, against a backdrop of a lull in energy prices and “better resilience of the economy”. It should reach 5.3% in 2023, against 6.3% forecast at the end of December, then 2.9% in 2024 and 2.1% in 2025. The euro zone should experience GDP growth of 1% this year, against 0.5% previously forecast, before 1.6% in 2024 and 2025.