ECB Raises Interest Rates, Weighs Inflation vs Financial Stability Risks
On Thursday, the European Central Bank (ECB) raised interest rates by a half percentage point, pressing ahead with its fight against inflation despite concerns that this could exacerbate strains in the financial system.[0] In a statement, the ECB said it would increase its key rate to 3%, the highest level since 2008, while promising to provide liquidity support to the financial system if needed.[1] This action comes after two consecutive half-point rate hikes in February and December.[1]
The ECB noted that “inflation is projected to remain too high for too long” and upgraded its economic forecasts as it sees eurozone GDP growing an average of 1% this year.[2] It is anticipated that the economy will expand by 1.6% in 2024 and 2025.[3] The ECB also revised up growth estimates for the euro economy, with growth estimated to average 1% in 2023.[4]
The ECB said that the euro area banking sector is resilient, with strong capital and liquidity positions.[5] It noted that its policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.[3]
In light of recent financial market developments, the ECB is weighing inflationary pressures against the risk of adding further stress to markets. The ECB said it 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’s focus remains fixed on inflation, which it said is starting to fall even as core inflation embeds itself in the larger economy.[3] In its updated staff projections, the central bank said it expects inflation to average 5.3% this year, followed by 2.9% in 2024 and 2.1% in 2025.[6] The ECB is also aware that Credit Suisse has taken up to 50bn Swiss francs from the Swiss National Bank in what it called “decisive action” to strengthen its liquidity, and is ready to respond as necessary to preserve price stability and financial stability in the euro area.[7]
Overall, the ECB is striking a balance between inflation and financial stability risks, and will be ready to provide liquidity support to the financial system if needed. The bank is determined to return inflation back to the 2% target in the medium term and is monitoring current market tensions closely.
0. “European Central Bank sticks to its rate-hiking guns, says banks ‘resilient'” CNN, 16 Mar. 2023, https://www.cnn.com/2023/03/16/economy/european-central-bank-interest-rates/index.html
1. “ECB Defies Mounting Banking Strains With Half-Point Rate Rise” The Wall Street Journal, 16 Mar. 2023, https://www.wsj.com/articles/ecb-raises-rates-by-half-point-despite-mounting-banking-stress-41c8bae
2. “Why ECB looked past Credit Suisse drama to deliver another supersize rate hike” MarketWatch, 16 Mar. 2023, https://www.marketwatch.com/story/european-central-bank-delivers-half-point-hike-to-interest-rates-36cd346b
3. “ECB pushes forward with 50 basis point rate hike and monitoring market tensions” Kitco NEWS, 16 Mar. 2023, https://www.kitco.com/news/2023-03-16/ECB-pushes-forward-with-50-basis-point-rate-hike-and-monitoring-market-tensions.html
4. “European Central Bank delivers huge interest rate hike despite banking sector “tensions”” Axios, 16 Mar. 2023, https://www.axios.com/2023/03/16/europe-bank-rate-hike-banking
5. “India News Updates: Rajesh Gopinathan has resigned as CEO & MD of TCS” Economic Times, 16 Mar. 2023, https://economictimes.indiatimes.com/news/newsblogs/daily-news-and-latest-updates-live-16-march-2023/liveblog/98679077.cms
6. “ECB keeps eye firmly on inflation amid banking crisis fears” POLITICO Europe, 16 Mar. 2023, https://www.politico.eu/article/ecb-lifts-rates-by-half-a-percent-amid-financial-market-turmoil/
7. “Credit Suisse stock tumbles, fueling more concerns about banking” CBS News, 16 Mar. 2023, https://www.cbsnews.com/news/credit-suisse-silicon-valley-bank-svb-banking/
