The European Central Bank (ECB) increased interest rates by 50 bps on Thursday, taking the main deposit rate to 3 per cent. The move comes in the wake of financial market tension and sharply changing expectations for peak interest rates triggered by the collapse of Silicon Valley Bank last week.
After the February meeting, ECB president Christine Lagarde signalled that the central bank intended to raise rates by another 50 basis points in all but a “quite extreme” scenario. Given the market turmoil of the past week, there had been some speculation that the ECB might decide on a smaller increase or even pause hikes altogether. Carsten Brzeski, global head of Macro at ING, noted in the wake of Thursday’s decision that “price stability concerns clearly trump any financial stability worries – at least for the time being”.
Jack Allen-Reynolds, eurozone economist at Capital Economics, described the ECB’s decision to raise rates by 50bps as the “riskiest of the available options”. Allen-Reynolds said that “we think investors would have understood if the Bank decided to pause”, expressing doubt that a decision by the ECB to pause its tightening cycle would have been “taken as a sign of panic from policymakers”.
The ECB’s next move now looks uncertain, and the Bank did not issue any new forward guidance setting out where rates would head next.
ING’s Brzeski said that “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 Bank has revised its inflation forecasts lower, with projected core inflation in 2025 dropping to 2.2 per cen from the previous forecast of 2.4 per cent.
It is likely that the ECB’s peak interest rate has been knocked down as a result of the market tensions seen this week. According to Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, the ECB may have already reached the end of its tightening cycle, though he added that “it is too soon to pick through the pieces from this week’s wild volatility in bonds and rates”.
