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European Central Bank Raises Eurozone Interest Rates Despite Credit Suisse Turmoil – Business Live

ECB raises eurozone interest rates by 50bp despite turmoilNewsflash: The European Central Bank has pressed on with its plan to raise interest rates by half a percent, despite the turmoil in the banking sector.

The ECB’s governing council has voted today to increase its three benchmark interest rates by 50 basis points – as it had pre-committed to at its previous meeting in February.

This means the ECB’s main interest rate rises to 3.5%, from 3%.

That is a surprise for markets, though, as some investors and economist had expected the ECB to rethink whether such a large increase in borrowing costs was wise in the current situation.

However, the ECB has decided to press on in its fight against inflation.

It says:

Inflation is projected to remain too high for too long. Therefore, the Governing Council today decided to increase the three key ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium-term target.

The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions, which will be determined by its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

Key events

Q: Will the ECB slow the pace of its rate hikes because of financial stability?

Lagarde insists there is no trade off between price stability and financial stability.

We are demonstrating thistoday, she says, by addressing the price stability issue by raising interest rate by 50 basis points – as intended – because inflation is over target.

We also are monitoring market tensions, Lagarde reports, adding that:

We stand ready to provide any kind of additional facilities needed.

Today’s decision to raise interest rates by 50 basis points was not unanimous, Christine Lagarde, reveals, but it was taken quickly.

The ECB president explaints the executive board proposed today’s decision, and it was adopted by “a very large majority” of the governing council.

But, three or four members that did not support the decision.

Lagards says these dissenters were keen to probably give a bit more time to see how the situation unfolds, and collect additional data. “Otherwise, it was a very large majority decisionm” she insists.

Christine Lagade insists that the ECB’s determination to fight inflation is intact, and should not be doubted.

She says:

We are not waning on our commitment to fight inflation and we are determined to return inflation back to 2% target in the medium term.

Lagarde: Banks are much stronger than in 2008Q: Are we on the verge of a systemic crisis like in 2008?

Lagarde repeats that the ECB’s Governing Council is “monitoring current market tensions closely” and stands ready to respond as necessary to preserve price stability and financial stability.

She reminds reporters that she involved in the 2008 financial crisis [as France’s finance minister], and knows that reforms have been implemented since those dramatic days.

She says policymakers reformed the framework to strengthen the financial system, agreed on the Basel III regulatory framework, increased the capital ratio (determining how much capital banks must hold in case of crisis) and increase the financial coverage ratio.

She adds:

I think that the banking sector is currently in a much much stronger position than it was back in 2008.

We do have tools and facilities on hand too, Lagarde says.

The ECB president adds that “we have all worked hard in the last few days, and particularly the last few hours”.

She says the EEB staff can act quickly and creatively if they need to fight a liquidity crisis.

Our staff…have demonstrated in the past that they can also exercise creativity in very short order, in case it is needed to respond to what could be a liquidity crisis, if there was such a thing.

But, this is not what we are seeing.

Q: How do you see the path for interest rates ahead? You haven’t given any guidance at today’s meeting – have we reached peak interest rates?

Lagarde explains that three components will determine future rate decisions.

Thet are 1) the incoming economic and financial data, 2) the dynamics of underlying inflation, and 3) the strength of monetary policy transmission.

Lagarde adds that:

If our baseline was to persist when the uncertainty reduces we know that we have a lot more ground to cover. But it’s a big caveat.

She also explains that the ECB’s latest forecasts were drawn up before the recent financial tensions blew up, so they do not incorporate any of the most recent developments.

Christine Lagarde then explains that market interest rates rose considerably in the weeks after the ECB’s last meeting in early February.

But, she adds, the increase has “strongly reversed over recent days” amid the severe financial market tensions.

Bank credit to euro area firms has become more expensive. Credit to firms has weakened further, owing to lower demand and tighter credit supply conditions

Household borrowing has become more expensive as well, especially owing to higher mortgage rates.

This rise in borrowincg costs has hit demand, and led to a further slowdown in the growth of loans to households, she adds.

Lagarde: financial market tension could hit confidenceThe risks to the outlook for economic growth are tilted to the downside, Christine Lagarde warns.

In a nod to the turmoil in the markets of late, the ECB president says:

Persistently elevated financial market tensions could tighten broader credit conditions more strongly than expected and dampen confidence.

Russia’s unjustified war against Ukraine and its people continues to be a significant downside risk to the eocnomy and could again push up the cost of energy and food.

She adds the could also be a drag on eurozone growth if the global economy weakens more sharply than expected.

Christine Lagarde explains that the euro area stagnated in the 4th quarter of 2022, thus avoiding the contraction which had been previously expected.

She predicts that the economy will recover over coming quarters, and says the eurozone’s labour market is strong.

The ECB president says:

“The economy looks set to recover over the coming quarters. Industrial production should pick up as supply conditions improve further, confidence continues to recover and firms work off large order backlogs.”

Lagarde says that government efforts to help households with high energy bills should be temporary and targeted, and designed to encourage people to use less energy.

Christine Lagarde outlines the ECB’s new inflation projections, which are lower than three months ago.

ECB staff now see inflation averaging 5.3% in 2023 (down from 6.3% previously forecast), 2.9% in 2024 (down from 3.4%), and 2.1% in 2025 (down from 2.3%), she says.

But core inflation is a concern.

Lagarde says:

At the same time, underlying price pressures remain strong. Inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, which is higher than foreseen in the December projections.

Christine Lagarde holds press conferenceEuropean Central Bank president Christine Lagarde is giving a press conference now, outlining today’s decisions.

She’s starting by reading out the statement issued half an hour ago, explaining that the ECB has increased the rate on its key interest rates by 50 basis points, “in line with its determination to ensure the timely return of inflation to the 2% medium-term target.”

Lagarde explains that the ECB’s governing council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability, as covered earlier.

Price stability concerns clearly trump any financial stability worries at the European Central Bank – at least for the time being, says Carsten Brzeski, economist at ING.

Brzeski writes that since the financial crisis in 2007 and 2008, financial markets have got used to the idea that central banks will always play the lender of last resort [as Bagehot wrote many years ago….]

But, Brzeski says, high inflation makes it harder for central banks to play a fire-fighting role:

In a European context, be it a financial crisis, a euro crisis or a pandemic, the ECB has always been there to help. “Whatever it takes”, if needed. However, the big difference between the last 15 years and now is that there is a severe inflation problem.

The ECB cannot simply return to its role of firefighter as it has to fight inflation. The fact that balancing between financial stability and price stability can be quite a conflict of interest for the ECB has already been clear since European bank supervision, in the wake of the euro crisis, was moved to the ECB.

It shouldn’t be a surprise to anyone that the most aggressive monetary policy tightening since the start of the eurozone in 1999 has and will have adverse effects, Brzeski adds:

What markets and central bankers are currently experiencing is actually what undergraduate students learn at college in their first year of studying economics: monetary policy has an impact on the economy.

The last few days have been a good reminder to the ECB that the next steps in fighting inflation will be much harder than the steps taken so far. The first phase of exiting the so-called unconventional measures (negative interest rates and bond purchases) went relatively smoothly, but now that interest rates are in restrictive territory, every additional rate hike increases the risk of breaking something. As a result, we expect the ECB to turn more dovish today and in the coming weeks, probably hinting at a slowdown in the pace and size of any further rate hikes.

Economist Mohamed El-Erian, advisor to Allianz, says the ECB has set aside financial stability concerns by sticking with its plan to raise interest rate by half a percent today.

Setting aside for the moment financial stability concerns, the @ECB hiked by 50 bps as it had repeatedly guided–this despite revising down its inflation projections.

This press conference from President @Lagarde will be an important one, particularly when it comes to other tools

— Mohamed A. El-Erian (@elerianm) March 16, 2023 Following today’s move, the European Central Bank’s main refinancing operations rate has gone up to 3.5%, from 3%.

The rate on its marginal lending facility, which is charged to eurozone banks who borrow overnight from the ECB, rises to 3.75%.

Its deposit facility, which is paid on eurozone bank deposits left at the ECB, will be increased to 3.00%.

The European Central Bank also says that it ‘stands ready’ to tale action to protect the eurozone banking system.

In a nod to the turmoil in the financial system this week, the ECB’s governing council says:

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.

In any case, 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 raises eurozone interest rates by 50bp despite turmoilNewsflash: The European Central Bank has pressed on with its plan to raise interest rates by half a percent, despite the turmoil in the banking sector.

The ECB’s governing council has voted today to increase its three benchmark interest rates by 50 basis points – as it had pre-committed to at its previous meeting in February.

This means the ECB’s main interest rate rises to 3.5%, from 3%.

That is a surprise for markets, though, as some investors and economist had expected the ECB to rethink whether such a large increase in borrowing costs was wise in the current situation.

However, the ECB has decided to press on in its fight against inflation.

It says:

Inflation is projected to remain too high for too long. Therefore, the Governing Council today decided to increase the three key ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium-term target.

The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions, which will be determined by its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

The European Central Bank is the first major central bank to meet since financial stability concerns escalated, points out Stephen Innes, managing partner at SPI Asset Management.

So, today’s ECB decision could be a foreshadowing of the US Federal Reserve’s meeting next week, where the Fed must decide whether to press on with its interest rate increases.

Innes says:

While many prominent house economists maintain their baseline for a 50bp [hike by the ECB], many traders think a pause is more likely than a 25bp hike. Compared to most policy decision days, central banks now have a larger relevant information set than investors.

While macro data is equally available for central banks and market participants, central banks have better visibility into micro bank side data, which matters most currently. As a result, there are several risks around today’s ECB meeting depending on the combination of the decision and President Lagarde’s tone in the press conference

Switzerland’s second largest political party is demanding for more transparency around how Credit Suisse’s crisis came about, and pushing for those responsible to be held accountable.

Cederic Wermuth, the co-president of the Social Democrats at a conference (via Reuters)

“We could have seen this coming.

“We demand that those responsible really be held accountable.”

*SWISS CABINET TO HOLD EXTRAORDINARY MEETING TO DISCUSS CREDIT SUISSE – MEDIA REPORTS

*SWISS SOCIAL DEMOCRATIC PARTY SAYS IT DEMANDS THAT THOSE RESPONSIBLE BE HELD ACCOUNTABLE AT CREDIT SUISSE

🇨🇭🇨🇭 pic.twitter.com/AoODayK3pK

Investing.com (@Investingcom) March 16, 2023 The Social Democrats back the Swiss National Bank’s decision to step in, but said it wants the public sector to be compensated for the risk.

As things stand, Credit Suisse hasn’t yet accessed the 50bn Swiss franc loan available from the SNB, but has said it intents to exercise its option to do so.

U.S. Treasury Secretary Janet Yellen will tell the Senate Finance Committee later today that the US banking system remains sound, and that Americans can feel confident that their deposits will be there when needed.

Yellen is due to testify to the committee at a budget hearing.

Her prepared testimony, released this morning, shows she’ll explain that the government took “decisive and forceful” actions this week to shore up public confidence in the banking system after the collapse of Silicon Valley Bank

Yellen will say:

“I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them.

“This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe.”

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