By Balazs Koranyi and Francesco Canepa
FRANKFURT, March 16 (Reuters) – European Central Bank leaders meet on Thursday amid unusual financial market turmoil that could force it to deviate from plans for another sharp interest rate hike , despite the fact that inflation remains too high.
After embarking on a campaign to rein in price growth that has seen it raise rates since July at the fastest pace on record, the ECB had set a further 50 basis point (bp) hike for Thursday .
Yet the fall of Silicon Valley Bank (SVB) in the United States last week raised concerns about tensions in the banking sector and sent stocks tumbling, compounded this morning by the bankruptcy of Credit Suisse, long weighed down by various problems. .
Now the ECB must balance its credibility in fighting inflation with the need to maintain financial stability in the face of oppressive external turbulence.
The task becomes even more complicated if one takes into account the fact that the central bank of the 20 countries which use the euro had already promised to raise its deposit rate by 50 basis points on Thursday, up to 3%.
“Unless the ECB sees the outlook for inflation significantly different from a week ago, any move below 50 basis points would be a huge mistake and damage credibility,” the Danske economist said. Bank Piet Haines Christiansen.
Eurozone inflation was 8.5% in February, below its highs of last fall but well above the ECB’s 2% target, and the outlook is expected to remain bleak.
Although inflation forecasts are reduced due to the fall in energy prices, the new figures will still show price growth well above target in 2024 and slightly above target in 2025, said to Reuters a well-informed source.
In addition, core inflation expectations, an indicator of the sustainability of price growth, will be raised, suggesting disinflation will continue and monetary policy will need to remain tight for some time.
This outlook is so worrisome that prior to the banking sector turmoil, a long list of ECB leaders had advocated continued rate hikes beyond March.
However, markets are skeptical of the ECB’s resolve and have reduced bets on the magnitude of Thursday’s decision and subsequent rate hikes. Money market prices suggest investors now only see a 40-45% chance of a 50 basis point hike, up from 100% last week but still above the 20% projected last week at a given time on Wednesday.
Credit Suisse said on Wednesday it would borrow up to $54 billion from the Swiss National Bank to bolster its liquidity, after falling stocks heightened fears of a global banking crisis.
Banking stress is significant enough for the ECB to deviate from its own guidelines and scale back its tightening plans, some have argued.
“In our view, current events are extreme, warranting a reassessment of our view of the ECB,” said Silvia Ardagna, economist at Barclays.
“We see a 20% chance of no upside, 60% chance of a 25bps upside and 20% chance of a 50bps upside.”
The ECB’s highest rate in the current tightening cycle, also known as the terminal rate, is now seen at around 3.25%, down from 4.1% last week, marking an extraordinary shift in valuation of the market.
Included if the BCE sigue adelante con la subida de 50 basic puntos, es casi seguro que se alejará de su practice reciente de señalar su siguiente paso y dejará la puerta abierta de cara a la reunion de mayo, incluso if the trend is maintained at tipos bigger.
ECB President Christine Lagarde will almost certainly try to reassure investors about the health of the bloc’s banks, arguing that they are better capitalized, more profitable and more liquid than in previous periods of turbulence.
Still, the ECB is unlikely to come up with any concrete measures to help banks, especially as it has just removed a subsidy from a key liquidity facility in a bid to divert banks from central bank liquidity.
However, Lagarde could signal that the ECB is ready to intervene if the contagion begins to damage the health of eurozone banks, thus preventing the effective implementation of the ECB’s monetary policy.
“The ECB will stick to the principle of separation: direct monetary policy towards inflation targeting and use other tools to ensure financial stability,” BNP Paribas said. “In fact, interest rates are probably not the right tool to solve a liquidity problem.” (Reporting by Balazs Koranyi; edited in Spanish by Tomás Cobos)