Defiant European Central Bank continues with 0.5% interest rate hike despite financial market turmoil
The European Central Bank (ECB) yesterday continued to hike interest rates by half a percentage point despite financial market turmoil, but admitted the crisis could weigh on the economy as a whole.
ECB chief Christine Lagarde has stressed that she is focused on reducing inflation – and is watching turbulence closely.
The decision came hours after Credit Suisse agreed to a £45bn bailout from the Swiss National Bank amid global jitters over the sector.
Critical appeal: ECB chief Christine Lagarde (pictured) said rate setters were focused on curbing inflation but the bank was watching for turbulence
Investors are betting the turmoil will slow the pace of rate hikes by central bankers in Europe, America and the UK.
Rate decisions from the US Federal Reserve and the Bank of England are expected next week. The fear is that larger increases could spell further trouble for lenders whose vast holdings of bonds lose value when rates rise.
Lagarde insisted that there could be no “trade-off” between the hikes needed to tackle inflation – at 8.5% in the eurozone – and financial stability.
She played down the idea that a financial crisis of the magnitude of the 2008 crisis could be underway, saying banks were now “much stronger”, but acknowledged the potential for the crisis to ripple through the economy at large.
The ECB rate is now 2.5% to 3%, its sixth consecutive rate hike. Lagarde said he was backed by a “very large majority” of pricing executives.
Tom Hopkins of BRI Wealth Management said: “Some may find this increase surprising given investor fears about the soundness of the banking system.”
Carsten Brzeski, at ING Bank, said: “Every further rate hike increases the risk of something breaking. We expect the ECB to become more dove, likely suggesting a slowing in the pace and size of further increases.
Paul Dales of Capital Economics said it was “almost 50/50” whether the Bank would opt for a quarter-point hike or end the hikes.
Much will depend on what happens in the global banking system by next Thursday,” Dales said.