Script fulfilled. Promise kept. No change of direction. The European Central Bank (ECB) decided yesterday to raise the price of money 50 basis points to 3.50%. "Inflation is expected to stay too high for too long," was the phrase chosen to justify the rate hike.
But the entity chaired by Christine Lagarde also gave a nod to the markets, after the recent banking crisis following the collapse of Silicon Valley Bank (SVB) and Credit Suisse: she added that they will closely monitor "financial stability", a mission that is compatible, according to the French, with the battle to curb inflation.
“The ECB has decided to maintain the announced half-point rise in interest rates, prioritizing its credibility in the fight to control inflation but without committing itself to future decisions,” said IESE professor Xaver Vives. "At the same time, he recalled that he is prepared to offer liquidity to banks if necessary, as well as to countries if there are sovereign debt tensions," he added.
Indeed, the entity that Lagarde presides over was faced with a dilemma. Or he fulfilled his promise and his objective of lowering inflation to 2% (since the core is at levels that are more than double what was desired). Or it breathed air into the markets, hit by banking crises, reduced or suspended increases in the price of money and thus avoided drowning the economy more than necessary. In the end, in a skilful Solomonic move, he gave faith to his word, he remained firm with his mission but at the same time he said that he will offer all the necessary instruments to guarantee solidity to the bank. This was recognized by several analysts in their reports.
“Of all the big central banks, the ECB probably had the least flexibility to pause because it was so late to the tightening party and therefore behind the curve,” Craig said in a note. Erlam, from Oanda. “The possible fragilities of the banking system must be addressed with policy instruments other than interest rates. And the ECB has many such instruments on hand,” recalled Sylvain Broyer, chief economist at S
To justify her rate increase, Lagarde also resorted to a curious motivation... calendar. Since the ECB's analysis focuses – she often repeats it ad nauseam – on data, and since these were collected in the days (and weeks) prior to the meeting, the latest banking crises in Silicon Valley and Switzerland came, as it were, out of time, being too recent. Thus, the SVB and Credit Suisse variables were not reflected in the information available at the time of making the decision. In other words, the ECB meant that if necessary, they could leave the door open for a slowdown in rate hikes further down the line as long as financial instability had a tangible impact on the economy. For this reason, unlike on other occasions, it did not offer any future orientation of monetary policy.
In any case, the ECB's decision was not adopted by a large majority, but not unanimously, Lagarde acknowledged. Some countries doubted whether it would not have been better to take a pause. Many remember the ghost of the previous president of the institution, Jean Claude Trichet, who decided to raise rates a few weeks before the financial crisis of the Great Recession of 2008 broke out. Lagarde specified that the situations are very different, because each crisis is different. and now the banks are healthier and there are also many options to provide liquidity, should it be necessary.
“The euro area banking sector is resilient and has strong capital and liquidity positions,” according to the ECB. In addition, since that financial crisis and the sovereign debt crisis in the euro area, the ECB has assumed supervision of the largest banks in the euro area, so they are better supervised.
In this sense, the vice president of the ECB, Luis de Guindos, said that the exposures of banks in the euro area to Credit Suisse are "quite limited" and are not concentrated" and that the exposures to US banks are also "limited ”. "The European banking industry is resilient," reiterated the Spanish executive.
The central bank took advantage yesterday to update its forecast table. Inflation this year will remain at 5.3%, one point less than what was projected in December. The underlying, however, will rise to 4.6%, four tenths more. In 2024 it will be 2.9% and in 2025 2.1%, also downward. Growth, for its part, will be 1%, double that of December, to stay at 1.6% for the next two years.