ECB, which is expected to lift interest rates by a half-point, will get chance to address banking crisis

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The first central bank that will have a chance to address the collapse of California’s SVB Financial last Friday will be the European Central Bank, which meets Thursday to determine interest rates.

SVB had a minimal presence in the eurozone, apart from offices in Germany and Ireland, but investors fear a deposits exodus for its eurozone peers. The Euro Stoxx banks index

has dropped 12% in the last week. The 2-year German bund

was yielding 2.81% on Tuesday, down from 3.33% last Wednesday.

Investors are hoping the ECB won’t be as stubborn as it has been in the past. “In the past, the ECB has shown itself to be dogmatic in the face of changing news. This caused problems in mid-2008 when it raised rates as the banking situation was deteriorating in the U.S.,” said David Dowsett, global head of investments at GAM Investments.

The ECB is expected to deliver another half percentage point interest rate rise on Thursday, with the real question being how many further hikes it suggests, and whether it will guide to a half-point rate rise in May to restrain inflation.

While the headline rate of inflation has cooled a bit, to 8.5% from as high as 10.6% year-over-year, the core rate of inflation has actually accelerated, to 5.6%. Wages, which are difficult to track in Europe, appear to be rising. On the flip side, wholesale natural gas prices have dropped sharply, and even wage deals seem to show a temporary rather than sustained increase in pay.

“As a result, the ECB may leave the size of the May move and the subsequent policy path open this week, emphasising a return to a data-dependent ‘meeting-by-meeting’ approach,” said Holger Schmieding of Berenberg Bank.

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