The European Central Bank (ECB) will announce on Thursday whether it will raise interest rates once more in the fight once morest inflation. But the regulator must also take into account concerns regarding problems at banks. A new interest rate hike might actually fuel that unrest.
Higher prices for energy, groceries and fuel have recently caused many problems for households and businesses. To do something regarding this, the ECB has raised interest rates a few times since June last year. These increases should ensure that consumers spend less and save more. As a result, prices usually go down.
But this time it is proving more difficult to get inflation under control. For example, last month’s inflation rate was higher in many countries than in January. The ECB therefore announced last month that it would raise interest rates even further in March.
With higher interest rates, a recession is lurking. As a result, the ECB has been in a dilemma for some time. And now there is a problem: since a week there has been unrest on the financial markets. First due to the collapse of the Silicon Valley Bank (SVB) and on Wednesday due to problems at the large Swiss bank Credit Suisse.
The higher interest rate played an important role, especially at SVB. The bank had bonds and decided to sell a large part of them. But the higher interest rates had made these bonds worth less. The company therefore had to take a significant loss. That news quickly spread among customers of the bank, as a result of which many account holders removed their money from SVB. This created a bank run that SVB might not handle.
Additional unrest makes ECB more cautious
Although the problems at Credit Suisse are of a different nature, they do lead to extra unrest. “All this adds an extra dimension to the ECB,” says Harald Benink, Professor of Banking and Finance at Tilburg University. “After all, the ECB also has the task of ensuring stability. And for that it is better not to raise interest rates.”
Nevertheless, Benink expects the regulator to announce a new interest rate increase of 0.5 percentage point on Thursday. He does think that the ECB will be more cautious regarding any additional increases later this spring.
‘ECB is not yet in panic mode’
Rabobank economist Stefan Koopman also thinks that the ECB will raise interest rates by 0.5 percentage point. “The impact of SVB in Europe has been small so far. The ECB’s crisis team has not met, so they will not adjust their interest rate decision at the last minute,” he expects.
“Ordinary banks may become more cautious in the coming period, for example when taking out loans. If this happens, the ECB may become more cautious with new increases later this spring. So that way the SVB debacle can be consequences. But the ECB has not gone into panic mode.”
