ECB lifts interest rates amid financial market turmoil
Rate hike had been well flagged, but recent market turmoil had meant it was less than certain.
FRANKFURT – The European Central Bank decided to raise interest rates by 0.5 percentage points to 3 percent Thursday, sticking to its previous guidance even as fears about a new financial crisis have roiled markets in recent days.
Policymakers clearly opted to prioritize a continued fight against raging inflation over financial stability concerns noting that “inflation is projected to remain too high for too long.”
After the collapse of two U.S. banks and turmoil at Swiss banking giant Credit Suisse, worries about a potential banking crisis raised doubts over the ECB’s previously signaled rate path — sending financial markets’ bets on a likely move today and peak interest rates on a rollercoaster ride since Monday.
Today’s decision will expose ECB President Christine Lagarde to criticism that she is repeating mistakes made by former President Jean-Claude Trichet, who raised rates into the 2011 sovereign debt crisis arguing that anchoring inflation expectations is the best way to boost confidence in the single currency area.
The move has gone down in history as a massive policy error that scarred the ECB’s credibility for years.
The ECB acknowledged the current uncertainty and dropped a reference to having to raise interest rates “significantly” further, instead underlining its readiness to react to incoming data.
“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,” it said.
The ECB also assured that the Governing Council “stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” while assuring that the region’s banking sector is resilient. “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,” it said.