The European Central Bank does not hesitate to raise interest rates by 50 basis points

There was great skepticism about what the ECB would do. Until recently, everyone assumed that the European Central Bank would raise interest rates again by 0.5 percentage points. Until last week, when a Silicon Valley bank ran into trouble over losses in its bond portfolio, sparking fears of a new banking crisis.

The ECB still believes that inflation will remain too high for a very long time, which justifies a new interest rate hike of 0.5 percentage points. The policy rate is now at 3 percent. According to the new inflation projections, inflation will be 5.3 percent in 2023, 2.9 percent in 2024, and 2.1 percent in 2025.

Therefore, the fear of very high inflation is greater than the fear of a new banking crisis. The latter scenario was supported by the stock market yesterday when Credit Suisse also admitted to having financial problems and the stock subsequently fell. Bank stocks fell sharply in the stock market around the world after that. There has been a flight into fixed-income products such as bonds, which has led to lower long-term interest rates. Something the ECB wanted to avoid in order to fight inflation.

In its press release, the ECB said why it is not concerned about this: “The banking sector in the euro area is resilient, with strong capital and liquidity positions. In any case, the ECB’s policy tools are fully equipped to provide liquidity support when needed.