Last Updated: March 16, 2023 at 9:42 a.m. ET
First published: March 16, 2023 at 9:20 a.m. ET
The European Central Bank on Thursday went ahead with its plan to raise interest rates by 50 basis points or half a percentage point despite banking sector turmoil, warning that “inflation is expected to remain too high for too long”.
At the same time, the ECB said future decisions will depend on economic and financial data, suggesting a meeting-by-meeting approach and the abandonment of a policy of what was known as forward guidance aimed at massaging market expectations around future moves.
The…
The European Central Bank on Thursday went ahead with its plan to raise interest rates by 50 basis points or half a percentage point despite banking sector turmoil, warning that “inflation is expected to remain too high for too long”.
At the same time, the ECB said future decisions will depend on economic and financial data, suggesting a meeting-by-meeting approach and the abandonment of a policy of what was known as forward guidance aimed at massaging market expectations around future moves.
The ECB said last month it planned to raise rates by 50 basis points at Thursday’s meeting, but that was called into question after pressure on troubled Swiss lender Credit Suisse raised concerns about banks’ exposure in the euro zone.
Credit Suisse shares stabilized after the bank announced early Thursday that it would drain $54 billion in credit from the Swiss National Bank.
The ECB said future steps would depend on economic and financial data given an “increased level of uncertainty”. The ECB said it is closely monitoring current market tensions and “stands ready to respond where necessary to preserve price stability and financial stability in the euro area”. The ECB said the eurozone banking sector is “resilient, with strong capital and liquidity positions”.
“The decision not to issue new forward guidance on interest rates can be seen as lenient given that many policymakers have said in recent weeks that they expect to raise interest rates further in May and beyond,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, in a note. “But the lack of forward guidance probably reflects growing divisions in the Board of Directors.”
The ECB faced a dilemma at Thursday’s meeting, analysts said.
The lack of a hike after last month’s pledge would have tarnished the ECB’s credibility, but policymakers also seemed unwilling to disappoint those who argued for a smaller hike or no hike at all, said Fawad Razaqzada, analyst at Forex.com and City Index, in a note. .
By not providing forward guidance, it provided “as moderate a rate hike as you would have seen in these circumstances,” he wrote.
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