The European Central Bank went ahead with a planned half-point increase in interest rates but was silent 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 the future path for rates.
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 sector.
Despite warning that inflation is set to remain “too high for too long,” ECB officials declined to give guidance on what they’re likely to do when they next set borrowing costs — in May. That breaks with the practice of recent meetings amid the heightened financial-stability fears.
“The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions,” the ECB said in a statement. The central bank “is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability.”
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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 stabilization at Credit Suisse will be welcomed by the ECB, which is adamant that its battle with inflation remains far from over. The question now is whether the recent banking woes constrain its ability to tackle price gains that, while moderating, remain closer to double digits than its 2% target.
ECB 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.
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Markets think the ECB will now do less. They’ve pared bets on the peak in the rate-hike cycle to 3.2% from 4.2% a week ago.
President Christine Lagarde will hold a news conference at 2.45 pm in Frankfurt to elaborate on the ECB’s decision.
Before 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.
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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.
