Rebellious European Central Bank continues with interest rate hike of 0.5% despite turmoil in the financial markets
The European Central Bank (ECB) went ahead with a rate hike of half a percentage point yesterday despite the turmoil in financial markets, but admitted the crisis could take its toll on the wider economy.
ECB chief Christine Lagarde emphasized that it was aimed at curbing inflation – and closely monitoring the turbulence.
The decision came hours after Credit Suisse accepted a £45bn bailout from the Swiss National Bank amid global jitters over the sector.
Crunch call: ECB chief Christine Lagarde (pictured) said rate setters focused on curbing inflation but the bank was watching the turbulence
Investors are betting that the turmoil will slow the pace of rate hikes by central bankers in Europe, America and the UK.
The interest rate decisions of the US Federal Reserve and the Bank of England will follow next week. There are fears that more large increases could spell further trouble for lenders whose huge bond holdings fall in value as interest rates rise.
Lagarde insisted there could be no “trade-off” between the increases needed to fight inflation – at 8.5 percent in the eurozone – and financial stability.
She downplayed the idea that a financial crisis on the scale of the 2008 crisis could be underway, saying banks were “much stronger” these days, but acknowledged the potential for the crisis to bleed through into the wider economy.
The ECB’s rate is now 2.5 percent to 3 percent, the sixth consecutive rate hike. Lagarde said it was backed by a “very large majority” of rate setters.
Tom Hopkins, at BRI Wealth Management, said: “Some may find this increase surprising given investor fears about the strength of the banking system.”
Carsten Brzeski of ING Bank: ‘Any additional rate increase increases the risk that something will break. We expect the ECB to become more dovey, likely indicating a slowdown in the pace and magnitude of further hikes.”
Capital Economics’ Paul Dales said it was “almost 50/50” whether the bank would go for a quarter-point increase or end the increases.
A lot will depend on what happens in the global banking system between now and next Thursday,” Dales said.