Defiant European Central Bank powers on with 0.5% interest rate hike despite financial market turmoil

By JOHN-PAUL FORD ROJAS FOR THE DAILY MAIL
PUBLISHED: 16 March 2023

The European Central Bank (ECB) yesterday pressed ahead with a half percentage point interest rate hike despite financial market turmoil –but admitted the crisis could take its toll on the wider economy.

ECB chief Christine Lagarde stressed it was focused on bringing down inflation – and closely monitoring the turbulence.

The decision came hours after Credit Suisse accepted a £45billion bailout from the Swiss National Bank amid global jitters over the sector.

Crunch call: ECB chief Christine Lagarde (pictured) said rate setters were focused on bringing down inflation but that the bank was monitoring the turbulence

Investors have been betting that the turmoil will slow the pace of rate rises by central bankers in Europe, America and the UK.

Rates decisions from the US Federal Reserve and the Bank of England are due next week. The fear is that more big increases could spell further trouble for lenders whose vast holdings of bonds fall in value when rates go up.

Lagarde insisted there could be no ‘trade-off’ between the rises needed to fight inflation – at 8.5 per cent in the eurozone – and financial stability.

She played down the idea that a financial crunch on the scale of the 2008 crisis could be under way, saying banks today were ‘much stronger’ but acknowledged the potential for the crisis to bleed into the wider economy.

The ECB rate is now 2.5 per cent to 3 per cent, its sixth consecutive rate hike. Lagarde said it was supported by a ‘very large majority’ of rate setters.

Tom Hopkins, at BRI Wealth Management, said: ‘Some may find this increase surprising given investor fears over the strength of the banking system.’

Carsten Brzeski, at ING Bank, said: ‘Every additional rate hike increases the risk of breaking something. We expect the ECB to turn more dove-ish, probably hinting at a slowdown in the pace and size of further hikes.’

Paul Dales, at Capital Economics, said it was ‘almost 50/50’ whether the Bank would go for a quarter-point rise or end the hikes.

A lot will depend on what happens in the global banking system between now and next Thursday,’ Dales said.