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ECB raised the rates.

 

ECB
The European Central Bank has defied market pressure to ease up on interest rates by pushing ahead with a bumper 50 basis-point rise in borrowing costs, despite market turmoil in banking stocks. In case of any emergency, the ECB said its «toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy». «The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,» the statement said. The ECB’s decision is the first response from a significant central bank following the tremors in the banking system.

Christine Lagarde, president of the ECB, insisted there was no trade-off between containing inflation through higher interest rates and preserving financial stability using emergency tools like providing cheap loans to the banking sector. ECB rate-setters have been battling stubbornly high inflation since the war in Ukraine a year ago. A measure of underlying inflation pressures, which strips out volatile elements like energy, rose in February to 5.6 per cent, encouraging hawkish rate-setters to stick with significant rate increases. However, the governing council said inflation «is projected to remain too high for too long».

She said up to four members of the ECB’s governing council wanted to wait and «give a bit more time» before increasing rates to the highest since the financial crisis. There had been some concern that any decision to pare back interest rate rises would raise the alarm among markets that the health of Europe’s banking system was not assured. At the press conference, de Guindos said that Europe’s banking system had «limited exposure» to turmoil in the US banking system. Lagarde said the ECB had more powerful tools to quell financial panic after the US central bank said it would ensure all deposits at SVB and allow banks to access significant bank money using their bonds as collateral.

Responding to the financial stress, the ECB dropped a previous commitment to keep raising rates in the future and instead said its next decisions would be entirely «data-dependent».

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  1. Frank17 March 2023 at 13:18

    It would have been better to wait it out for a bit more and not raise rates. I struggle to understand why they did this when everything was pointing to the exact opposite measures needed.

    ReplyDelete
  2. Justin17 March 2023 at 15:28

    The ECB did this because they are afraid of how the whole EU banking system would look if they did reduce rates. It's a calculated risk, a bit one but they probably needed to do this at the moment.

    ReplyDelete

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