ECB delivers half-point hike but offers little on next move
The European Central Bank went ahead with a planned half-point increase in interest rates but offered few clues on what may follow amid market turmoil that roiled Credit Suisse Group AG.
The deposit rate was lifted to 3% on Thursday — as officials have been flagging since their last meeting six weeks ago and as the majority of economists anticipated, but dropped language from its statement indicating where borrowing costs are headed.
It’s “not possible to determine at this point in time” the future path for rates, President Christine Lagarde told reporters in Frankfurt when pressed on what the next move may be. “If the baseline as we have it was confirmed and was to persist, we would have more ground to cover.”
After becoming engulfed in the turmoil set off by Silicon Valley Bank’s collapse, Credit Suisse’s stock embarked on its initial plunge just as the ECB’s Governing Council convened for its two-day gathering, raising concern about the health of the wider banking industry.
Asked whether the latest turbulence could herald a repeat of the last global financial crisis, Lagarde said “the banking sector is in a much, much stronger position than where it was back in 2008.”
A “large majority” of ECB policymakers backed this week’s decision, she said. With inflation is set to remain “too high for too long,” ECB officials aren’t “waning on our commitment to fight inflation, and we are determined to return inflation back to 2%.”
Lagarde said the ECB will keep taking a data-dependent approach to rate decisions, steered by economic and financial data, underlying price growth and the strength of monetary-policy transmission.
Quarterly economic projections that accompanied the announcement showed inflation slowing more than previously thought this year, alongside stronger underlying price gains that exclude volatile items like food and energy.
The question now is whether the recent banking woes constrain the ECB’s ability to tackle price gains that, while moderating, remain closer to double digits than its 2% target.
Vice President Luis de Guindos told European Union finance ministers on Tuesday that individual banks could be vulnerable to rising rates, though he said lenders in the region are much less exposed than their US counterparts, according to people familiar with the talks.
Markets think the ECB will now do less. They’ve pared bets on the peak in the rate-hike cycle to 3.15% from 4.2% a week ago.
Follow the ECB TLIV blog hereBefore the turmoil at SVB and Credit Suisse, the debate at the ECB over how high to send rates was already hotting up.
With the record euro-era spike in prices retreating since November, hawks have zeroed in on core inflation, which hit a record in February, to advocate more big hikes. Some of their colleagues, however, see the headline measure as the primary guide and oppose laying out plans so far ahead.
In the most notable clash, Italy’s Ignazio Visco openly criticized officials backing “prolonged” rate increases. His remarks came days after Austria’s Robert Holzmann speculated that this week’s 50 basis-point hike should be followed by three more.
The failure of SVB alone was expected to bring stiffer opposition from the doves to more large rate rises.
Their case may be bolstered by the slew of data that’s due before the next ECB meeting. That includes two more inflation readings that are both likely to reveal sharp slowdowns, with natural gas prices having plummeted following a mild winter.
Officials are also keeping a close eye on wages, on the lookout for signs of excessive increases that could entrench the current level of inflation. Recent deals, while substantial, haven’t generated undue concern.
Then there’s the Federal Reserve, which is only meeting next week and has longer to scrutinize the banking blowup before setting borrowing costs. While the Fed began tightening sooner, the two central banks are in similar positions, with each still facing the added danger of a recession.
How recent events will affect plans to shrink the ECB’s stash of bonds hoovered up in past stimulus drives is also unclear. Policymakers began reducing holdings by €15 billion a month in March, with that amount to be reviewed in June.
©2023 Bloomberg L.P.
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