Despite banking turmoil, the ECB continues to hike rates
In spite of financial market chaos and calls by investors to dial back policy tightening at least until sentiment stabilizes, the European Central Bank (ECB) raised interest rates by 50 basis points on Thursday in an attempt to curb inflation. According to Reuters, the ECB has been raising rates at its fastest pace ever, but a rout in global markets since Silicon Valley Bank (SVB) collapsed last week threatened to overturn those plans.
As inflation is predicted to exceed its 2% target through 2025, the central bank for the 20 euro-shared countries raised its deposit rate to 3%, its highest level since late 2008. “Inflation is projected to remain too high for too long,” ECB President Christine Lagarde told a news conference, reading from the statement agreed by the bank’s policymakers. In spite of previous calls for more big measures against inflation, the ECB statement offered no commitments for the future.
Capital, liquidity, and profits are all at healthy levels in the euro zone’s financial system, despite systemic banking crises generally morphing into deep recessions. According to some economists, the ECB has sufficient instruments to combat market stress, so sacrificing the rate move would not have been necessary.