The European Central Bank (ECB) decided this Thursday to increase benchmark interest rates by 50 basis points (half a percentage point), without backing down from the pace of monetary tightening that Christine Lagarde had predicted at the February 2nd meeting. The key policy rate increased to 3.5% and the rate of return on commercial bank deposits in the Eurosystem increased to 3%.
Monetary tightening in the eurozone now stands at 350 basis points (3.5 percentage points) since interest rate hikes began in July last year. The meeting announcement made no mention of the future pace of interest rates.
Despite the recent episodes of banking crisis in the United States, involving the bankruptcy of two banks, and in Europe. With the Swiss central bank’s bailout of Credit Suisse in the early hours of this Thursday, euro central bankers have not bowed to pressure to ease or even stop monetary tightening.
In the new macroeconomic forecasts put forward this Thursday, the ECB rejects the scenario of near-stagnation in the euro area in 2023, now pointing to 1% growth. Last December the forecast was 0.5%. Christine Lagarde’s team thus removes the context of monetary policy tightening with an economy headed for stagnation.
With headline inflation in the euro area in February remaining at 8.5% and core inflation (excluding volatile components) rising to 5.6%, the ECB is in no danger of slowing or prematurely reducing pressure to cool the economy in the eurozone. The tightening effected by the ECB is felt mainly in the debt of families, in the credit difficulties of companies and in the rise of public debt interest.
In the new macroeconomic forecasts presented this Thursday, ECB economists continue to see inflation in the euro area as still above 2% in 2025. last December meeting. They now point to 4.6% in 2023 and 2.2% in 2025. The ECB underlines that “inflation will remain too high for too long”. Which requires maintaining the tightening strategy.
Even with a stock market rout the day before, with MSCI’s eurozone index plunging 5%, its biggest daily drop since the start of the year, and a fortnight of major eurozone banks seeing losses of more than 6% on Wednesday, the ECB did not retreat from the episodes of the financial crisis nor did it feel pressured by the recommendations of distinguished economists such as Vítor Constâncio, former vice-president of the ECB and former Governor of the Bank of Portugal.
Constâncio, speaking on the eve of the meeting, on Rádio Renascença, in Portugal, advised Lagarde’s team to show signs of slowing down, reducing the climb. “ONEThe most immediate implications I would have were about monetary policy. By the way, I already tweeted about this today, suggesting instead that the ECB hike tomorrow [quinta-feira] rates by another 50 basis points, or 0.5, would be only half as much: 0.25. It was a sign of caution to this potential problem” created by the Crédit Suisse crisis.
The quick intervention of the US authorities in the bankruptcy of Silicon Valley Bank and Signature Bank and the rescue of Crédit Suisse calmed the financial panic. The expectation is that these are isolated episodes and not the first signs of a financial crisis.
“The Governing Council is closely monitoring current market tensions and stands ready to respond as necessary to maintain price stability and financial stability in the euro area. The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, the set of monetary policy instruments of the ECB fully enables the provision, if needed, of liquidity support to the euro area financial system and the maintenance of regular transmission of monetary policy,” the statement of the meeting states. .
The ECB appears to be moving away from both the pause strategy pursued by the Central Bank of Norway since last December and the Bank of Canada since January this year, and from the modest rate of just 25 basis points (a quarter of a percentage point ) of the interest rate hikes approved by the Reserve Bank of Australia on 7 March. Markets also expect the United States Federal Reserve (Fed) to again opt for a 25 basis point hike at its March 22 meeting. The probability of that modest increase is 69% according to interest rate futures tracked by the CME portal’s Fed Watch Tool.
The ECB’s balance sheet shrank by 10 billion euros between February 24 and March 10, according to data published this Thursday. It fell from 7839.4 to 7829.4 billion euros. At the asset level, the portfolio of securities bought under expansionary monetary policy programs – meanwhile deactivated – lost €6.5 billion. On the liability side, commercial banks increased the value of deposits with the ECB from 4112 to 4158.3 billion euros.