The ECB raises interest rates from 2.5% to 3% despite a bank run

The European Central Bank on Thursday raised the interest rate by 0.5 percentage point as promised, but declined to predict further action. The ECB’s decision was the first since the panic that gripped the banking sector after Friday’s collapse of the US bank in Silicon Valley.

The interest rate on deposits held by commercial banks with the ECB increased from 2.5% to 3%. Inflation will remain too high for too long, the bank said in a statement.

At its meeting in early February, the ECB raised the interest rate by 0.5 percentage points. and made it clear that he would repeat this step in March and then assess the situation. But the banking panic forced, for example, Deutsche Bank to lower its forecast for today to 0.25 percentage points, while the market showed an increase of 0.4 percentage points even before the announcement.

But the desire to ensure price stability, at least for now, is a higher priority for the ECB than financial stability problems, commented the central bank’s decision Carsten Brzeski, global director of economic affairs at ING bank.

With the collapse of SVB and Signature Bank, as well as the market attack on Credit Suisse for fear of running out of funds, central banks found themselves in a difficult position. Their aggressive interest rate hikes have started to cause problems in the banking sector, but inflation, which has fallen from all-time highs, remains quite high. In the US, the consumer price index increased by 8% in February compared to the corresponding month of 2022 (in January it amounted to 6.4%), and in the euro area – by 8.5% (in January – 8.6%).

Uncertainty is very high, strong selling of stocks is due to the volatility shock and other factors, said Ulrich Urban, an analyst at Berenberg Bank. He said the focus had shifted from fighting inflation to concerns about economic growth and financial stability, with markets now waiting for the Federal Reserve’s March 22 rate decision.

Markets and central banks have found themselves in a situation where first-year economics students study, writes Brzeski: monetary policy affects the economy. “No one should be surprised that the most aggressive tightening of monetary policy since the creation of the eurozone in 1999 has and will have a negative impact,” he said. Recent developments in the banking sector confirm that the first steps towards exiting unconventional policies (negative interest rates, asset purchases) went quite smoothly, but the next steps will be more difficult for the ECB:


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