BRUSSELS – The European Central Bank on Thursday raised interest rates by half a percentage point to 3 per cent, while insisting it was “monitoring current market tensions closely” in the wake of the collapse of Credit Suisse shares.
Speaking in Frankfurt, ECB President Christine Lagarde said the rate hike reflected the prioritisation of the continued fight against inflation over financial stability concerns, noting that “inflation is projected to remain too high for too long”.
The move by the ECB came amid fears of a market meltdown in the wake of the Credit Suisse drop, and last week’s Silicon Valley Bank collapse in the United States.
“We are monitoring current market tensions closely and stand ready to respond as necessary to preserve price stability and financial stability in the euro area,” Mrs Lagarde said.
“Our 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.”
Mrs Largarde recognised the market fluctuations but insisted the ECB would not be pressed into any sudden decisions.
“The elevated level of uncertainty reinforces the importance of a data-dependent approach to our policy rate decisions,” she said.
The ECB decision was scrutinised particularly closely amid concerns raising borrowing costs might backfire if this week’s market wobbles become a full-blown crisis – with some analysts saying rising rates were a key factor in the collapse of SVB.
With Credit Suisse suffering its worst day on record, investors were not only calling into question the solvency of one of Europe’s biggest banks, but also the soundness of the entire global banking system.
With the Federal Reserve’s next rate meeting still almost a week away, the ECB’s decision is seen as setting a tone that the banking turmoil is not yet worrying enough to head off action against inflation.
Nicolas Véron, a senior fellow at Bruegel, a Brussels-based think-tank, said it was overblown to talk of any rerun of recent financial crises. “I don’t think we are nearly like 2008,” he said, pointing to the massive global intervention to stabilise markets 15 years ago. “That was justified because capitalism was going down the tubes. But capitalism was not going down the tubes this week.”
Mr Véron added that it was important to distinguish between the banking crises. “The SVB was essentially a supervisory mistake. And there was a collective overreaction in crisis management, including the unlimited deposit guarantee,” he said.
“Credit Suisse is a separate situation and was developing for a while: there were concerns in the market. There will be a denouement for Credit Suisse, but it is likely to be orderly, precisely because it was flagged for a while.”