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 said. Euro guardians, however, are cautious about further monetary tightening and have backed away from their commitment to further "significantly" rate hikes 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 stock had hit an all-time low of CHF 1.55. Challenged to tackle 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.
"The ECB is staying the course (...) because any jump would have been interpreted as a weakness", analyzes Jens-Oliver Niklasch, of 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 clients access to their money deposited at 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 hike, 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 hike was no longer excluded by the markets. "Prudence would dictate that we pause [monetary tightening] and resume hikes later, but the ECB may find that its inflation-fighting credibility, already undermined, can't afford it,” ING analysts insisted ahead of the meeting.
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.
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 towards the economy. Because the battle against rising prices is far from over. 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, rose to a record level of 5.6%.
However, the ECB did not give any guidance on its rate policy in the coming months on Thursday, reneging on its commitment to raise rates further "significantly" in the coming months. “We still have a long way to go (…) our resolve is intact,” said ECB President Christine Lagarde, however, referring to the medium-term inflation target of 2%.
In its new forecast published on Thursday, the ECB estimates that the euro zone should see lower inflation and stronger growth than expected in 2023, against the backdrop of a lull in energy prices and "more resilience of the economy ". It is expected to reach 5.3% in 2023, compared to 6.3% forecast at the end of December, then 2.9% in 2024 and 2.1% in 2025. The euro zone is expected to experience GDP growth of 1% this year, compared to 0.5% previously forecast, before 1.6% in 2024 and 2025.