The European Central Bank did not allow itself to be frightened by the risk of a new banking crisis following the bankruptcy of the SVB.
NB with AFP
© JAKUB PORZYCKI / NurPhoto / NurPhoto via AFP
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Lhe risk of a new banking crisis did not influence the European Central Bank (ECB), which decided on Thursday for a new rate hike of half a percentage point in order to fight inflation, judging that the banks of euro area were strong and “resilient”. The guardians of the euro are however cautious regarding the continuation of monetary tightening and have given up on their commitment to raise interest rates further “significantly” in the months to come.
“It is not possible to determine at this stage what will be the path to follow” on rates, acknowledged ECB President Christine Lagarde, while the rout in the United States of Silicon Valley Bank (SVB) and Concerns around Credit Suisse have shaken the markets strongly for a week.READ ALSO Artus – The specter of a major shock for the European economy
The first major central bank to make a decision since the start of the stock market turbulence, the ECB engaged in a veritable balancing act ensuring that there was no “compromise” to be made, neither on financial stability nor on that of prices. This firmness somewhat reassured the European stock markets which closed higher: Paris gained 2.03%, Frankfurt 1.57%, Milan 1.38% and London 0.89%, gains that were nonetheless lower than their losses of the day before.
The global economy in doubt
Since last Friday, the bankruptcy of the SVB and two other American regional banks have revived the specter of the 2008 financial crisis which had destabilized the world economy. On Wednesday, it was the Swiss giant Credit Suisse which suffered the worst session in its history on the stock market following a panic movement linked to doubts regarding 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 offensive in Ukraine, the ECB in July began an unprecedented cycle of rate hikes, halting nearly a decade of cheap money in order to dampen demand. Any decision other than an increase of 50 basis points, announced in February, would have been seen as a volte-face and an attack on the credibility of the ECB, believe several analysts. The ECB’s interest rates are now in a range between 3% and 3.75%, the highest since October 2008. The next monetary decisions will be “dependent on the financial and economic data” of the moment, hammered at several times the first guardian of the euro.READ ALSO Facing the wall of inflation, it’s time to act
In the United States, the Fed 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 their assets on the balance sheet may suffer, with an increased risk of default among borrowers. more fragile and a mechanical drop in bond prices in the portfolio, which was fatal for SVB.
The battle is not over
The Frankfurt institution also took into account the lull in the stock markets following 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 hypothesis made the New York Stock Exchange rebound.
European markets were also reassured by Credit Suisse’s announcement that it was going to call on the Swiss central bank to borrow up to 50 billion Swiss francs (50.7 billion euros). The title Credit Suisse managed to regain more than 19% on Thursday. The ECB has not finished with its monetary tightening because “inflation should remain too high for too long a period”, warned Christine Lagarde. Inflation in the eurozone 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 level of 5 .6%.READ ALSO Artus – Inflation: why the management of the ECB is highly questionable
In its new forecasts published on Thursday, inflation is expected at 5.3% in 2023 – once morest 6.3% in December – then 2.9% in 2024 and 2.1% in 2025, very close to the objective of 2%, suggesting that the ECB might opt for lower rate hikes in the coming months. “Today’s decisions might mark the start of the final phase of the ECB’s tightening cycle […]comments Carsten Brzeski, economist at ING.
