ECB raises interest rates by 0.5% as banks stocks wobble

Policymakers at the European Central Bank (ECB) announced Thursday that they would go through with a planned 0.5% interest rate hike as the institution juggles both inflation and financial uncertainty amid turmoil that has gripped financial markets after the recent collapse of the Silicon Valley Bank (SVB) in the US.

The meeting comes a week after the collapse of SVP and news that Credit Suisse in Europe is also facing major difficulties.

This situation has sparked fear of global financial turmoil and speculation that the ECB might alter or even abandon its planned rate increase. But the move went ahead as planned soon after 2 p.m. local time (1300 GMT/UTC). 

The increase puts the ECB and the eurozone's base interest rate — the amount of interest charged to commercial lenders for borrowing money — at 3.5% The so-called deposit facility — the amount banks receive for capital deposited with the ECB — will rise to 3.0%. 

The changes take effect on March 22. 

Where does this leave eurozone interest rates?

Speaking to reporters after the meeting, ECB President Christine Lagarde said there had been "no tradeoff" between price and financial stability, after the rate hike.

Lagarde said the bank's approach showed that it was "addressing the price stability issue," noting that the move is "what we had intended, and because inflation is projected to remain way above our target and for too long."

A statement released by the ECB Thursday said: "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 euro area banking sector is resilient, with strong capital and liquidity positions." 

Furthermore, it claimed, "The ECB’s policy 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."

ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures remain strong. Still, the figures mark a pronounced deceleration from the 9.2% inflation in the eurozone in 2022. 

The ECB's rates for commercial lenders are far lower than those paid by typical consumers or businesses for mortgages or loans, but they nevertheless tend to have a direct impact on these rates. 

Euro rebounds off Credit Suisse lifeline

The euro and the Swiss franc regained some lost ground on Thursday on news that Credit Suisse would borrow up to 50 billion Swiss francs (€50.7 billion, $54 billion) from the country's central bank.

The euro was up 0.4%, after losing 1.4% a day earlier — the biggest change in six months.

Some analysts saw it as a sign that the market's mood was improving somewhat, hours before the ECB interest rate announcement.

"Now, Credit Suisse has the clout of (the) Swiss National Bank covering its back, which is a central bank that doesn't mess around in the time of crisis," Matt Simpson, senior market analyst at forex trading platform City Index, told the Reuters news agency.

"So ultimately, I think this is a good thing for market sentiment."

zc, js/msh (Reuters, AFP)