ECB puts inflation first, hikes rates by 0.5%

The ECB raised its key interest rate by 0.5% to 3% despite markets suddenly shifting expectations in the last 48 hours on the deteriorating outlook for financial markets

The bank, of which Christine Lagarde is president, said it made the decision because “inflation likely to remain too high for too long. Therefore, the Governing Council decided today to increase the three main ECB interests Prices by 50 basis points in line with its determination to ensure the timely return of inflation to the 2% medium-term target.”

It comes after the Swiss National Bank was forced to step in to provide its second-largest lender, Credit Suisse, with a £45 billion emergency loan facility.

Credit Suisse shares plunged earlier this week on fears it was facing a collapse that could have triggered a global financial crisis and hurt economic growth. The decline was prompted by its largest shareholder, the Saudi National Bank, which ruled out further investment. However, shares recovered today following the intervention of the Swiss National Bank.

The ECB said its Governing Council is “closely monitoring the current market tensions and stands ready to react as necessary to safeguard price stability and financial stability in the euro area”.

Other major central banks, including the Bank of England and the US Federal Reserve, are expected to end the current cycle of large rate hikes in a bid to stem runaway inflation.

The ECB kept interest rates at zero or below for a decade from 2012 until last September, when it ordered a 0.75% hike. Since then, there have been three more increases — one by 0.7% and two by 0.5%.

Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, said: “The European Central Bank has looked at what’s going on in the banking sector right now and has effectively said they’re happy with what’s happening, by raising interest rates halves one percentage point. Credit Suisse appears to be on the brink and the impact its collapse could have on Europe’s banking sector is profound, but the ECB continues to see inflation as the bigger risk to manage. And that might bode well, hoping firms like Credit Suisse and Silicon Valley Bank are isolated cases with their own circumstances.

“However, there is pressure on Christine Lagarde to act faster than inflation if things go wrong from here. The ECB continues to lag behind its US and UK counterparts on rate hikes.

“If inflation doesn’t come down quickly this year, the bank could find itself with two competing forces — a struggling financial system that will impact economic growth, and stubborn inflation that shows no signs of returning to target.” This is a tense time when central banks need to be agile and quick in their decision-making. For now, however, they decide to stay the course of fighting inflation.”