ECB President Christine Lagarde in Frankfurt, March 16, 2023 (AFP / Daniel ROLAND)
The European Central Bank did not let itself be frightened by the risk of a new banking crisis and 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 about the continuation of the monetary tightening and have given up on their commitment to raise 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.
ECB interest rates since 1999 (AFP/)
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 however lower than their losses of the day before. Wall Street also ended sharply higher.
– Banks stronger than in 2008 –
Since March 10, 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 Credit Suisse which suffered the worst session in its history on the stock market after a panic movement linked to doubts about its solidity. The Swiss giant will appeal to the Swiss central bank to borrow up to 50 billion Swiss francs (50.7 billion euros), an announcement which allowed its title to regain more than 19% on Thursday.
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.
ECB President Christine Lagarde in Frankfurt, March 16, 2023 (AFP / Daniel ROLAND)
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.
ECB 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 the first guardian of the euro on several occasions.
In the United States, the Fed will face a similar dilemma when it meets next week.
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.
– Battle not over –
The Frankfurt institution also took into account the lull in the stock markets after efforts on both sides of the Atlantic to restore investor confidence in the banking sector.
The headquarters of the European Central Bank in Frankfurt, February 2, 2023 (AFP / Daniel ROLAND)
Eleven US banks, including Bank of America, Citigroup and JPMorgan, have agreed to pay a total of $30 billion in deposits to troubled First Republic.
The Fed also announced Thursday that it has lent nearly $12 billion since Sunday to US banks to honor withdrawal requests from their customers.
The ECB has not finished with its monetary tightening because “inflation should remain too high for too long a period”, warned Ms. 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%.
In its new forecasts published Thursday, inflation is expected at 5.3% in 2023 – against 6.3% in December – then 2.9% in 2024 and 2.1% in 2025, very close to the 2% target, suggesting that the ECB may opt for lower rate hikes in the coming months.
“Today’s decisions could mark the start of the final phase of the ECB’s tightening cycle,” said Carsten Brzeski, economist at ING.