[ad_1]
The European Central Bank on Thursday plowed ahead with its plan to lift interest rates by 50 basis points, or half a percentage point, despite jitters over the banking sector, warning that “inflation is projected to remain too high for too long.”
At the same time, the ECB said future decisions would depend on economic and financial data, signaling a meeting-by-meeting approach and an abandonment of a policy of what had been known as forward guidance aimed at massaging market expectations around future moves.
The ECB said last month that it planned to raise its policy rate by 50 basis points at Thursday’s meeting, but that had been thrown into doubt after pressure on troubled Swiss lender Credit Suisse raised worries about the eurozone banking sector.
Credit Suisse shares stabilized after the bank said early Thursday it would tap $54 billion in credit from the Swiss National Bank.
Policy makers faced “a degree of uncertainty…that has certainly been amplified by the most recent financial tensions that we have observed in the last few days,” ECB President Christine Lagarde told reporters in a news conference after the decision.
“We were certainly confident that this 50 basis points rate increase was a robust decision considering the ground that needs to be covered” in fighting inflation, Lagarde said.
Updated ECB staff projections see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. The ECB’s inflation target stands at 2%.
The hike lifted the ECB’s key deposit rate from 2.5% to 3%. The ECB, which sets monetary policy for the 20-nation area that shares the euro currency. The euro
EURUSD,
flipped between gains and losses, recently trading little changed versus the U.S. dollar at $1.0576.
The yield on the 10-year German government bond
TMBMKDE-10Y,
was little changed around 2.13%. The Stoxx Europe 600 stock index
SXXP,
was down 0.1%. U.S. stocks were mostly lower, with the Dow Jones Industrial Average
DJIA,
down 151 points, or 0.5%, while the S&P 500
SPX,
slipped 0.2%.
The ECB said future moves would be dependent on economic and financial data given an “elevated level of uncertainty.” The ECB said it 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 ECB said the eurozone banking sector is “resilient, with strong capital and liquidity positions.”
“The decision not to give any new forward guidance on interest rates could be seen as dovish, given that many policy makers have said in recent weeks that they expect to raise rates further in May and beyond,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, in a note. “But the absence of forward guidance probably reflects the growing divisions on the Governing Council.”
The ECB faced a dilemma coming into Thursday’s meeting, analysts said.
Failure to raise rates after last month’s pledge would have dented the ECB’s credibility, but policy makers also appeared unwilling to disappoint those calling for a smaller rise or no hike at all, said Fawad Razaqzada, analyst at Forex.com and City Index, in a note.
By providing no forward guidance, it provided “as dovish a rate hike as you would have seen in these circumstances,” he wrote.
A smaller rate hike might have actually worried the market of the potential risk of a systemic failure in the European banking system, while strong inflation data gave support to hawks on the Governing Council, said Altaf Kassam gead of EMEA investment strategy and research at State Street Global Advisors.
[ad_2]
Source link
