New increases in interest rates were indirectly but clearly announced by its president European Central Bank Christine Lagarde. Responding to a related question, regarding the next moves on the interest rate front, he avoided specifying clearly how much the interest rates will increase and with a more “pace” the increases will be made. He said, however, that “we still have a lot of ground to cover” given that any decisions will be made taking into account both the outlook for inflation and its dynamics. So given that inflation, although falling, will remain high for a long time to come, she justified today’s decision to increase interest rates by 0.5%.

This decision was taken by a large majority by the Governing Council of the ECB, following a relevant recommendation by the Executive Board. As Christine Lagarde revealed, only two or three central bankers expressed a different opinion. He even defended this decision, despite the new data created by the recent financial turmoil, underlining that there is no dilemma between financial stability and price stability.

He also assured that European banks have sufficient liquidity and a strong capital base. They are in much better shape than they were when the financial crisis broke out after the collapse of Lehman Brothers. He even claimed that there are significant differences between European banks and the bankrupt American SVB. He emphasized that the ECB has effective tools in case European banks need to boost their liquidity.

As stated in the ECB’s announcement, “The Governing Council is closely monitoring the current turmoil in the markets and is ready to react, if necessary, to maintain price stability and financial stability in the euro area. The euro area banking sector is resilient, with a strong capital position and liquidity. In any case, the ECB’s toolbox is fully equipped to provide liquidity support to the euro area financial system if needed and to maintain the smooth transmission of monetary policy.”

The head of the ECB acknowledged, however, that high interest rates have begun to cause negative effects both in the financial sector and on the growth front, a fact that is already reflected in the ongoing revision of the Bank’s forecasts for the growth rate in the two years 2024-25.

As she said, the interest rate hike in the markets has reversed sharply in recent days following the major turmoil in the financial markets.

He acknowledged that loans to eurozone businesses have now become more expensive. Credit expansion to businesses has declined further, both due to lower demand and the stricter terms on which banks grant new loans. As for household borrowing Ms Lagarde said it has also become more expensive, especially due to higher mortgage rates. This increase in borrowing costs and the consequent reduction in demand, combined with the stricter credit criteria applied by banks led to a further slowdown in the growth of new lending to households.

Her decisions ECB and Christine Lagarde’s subsequent clarifications resulted in the euro strengthening against the dollar. By early afternoon the euro was trading at $1.0606 from the $1.0575 level it opened in the morning. As for bonds, the yields of most of them moved upwards, with the most indicative being that of the German 10-year bond, which ranged from 2.11% to 2.20%. In contrast, the yield on the Greek 10-year bond fell marginally to 4.26% from 4.28% yesterday.