The turmoil in the markets last week, initially due to the bankruptcy of the American bank Silicon Valley Bank (SVB) and then Switzerland’s Credit Suisse’s troubles, led many analysts to lower their expectations for rate hikes from European Central Bank (ECB) and the US central bank (Fed).

The ECB did not confirm those expectations in principle last Thursday as it raised its key interest rates by half a percentage point, as announced since February, with the aim of reducing inflation to its 2% target. However, she carefully avoided referring to further interest rate hikes in the future, as she had done in her previous announcements, stressing the need for decisions to be made at each meeting based on the data then available on the path of the general consumer price index and the structural inflation. After Thursday’s increases, the deposit rate stands at 3% and the refinancing rate at 3.5%.

ECB President Christine Lagarde said the current outlook for the future path of interest rates cannot be made, citing added uncertainty about the inflation outlook due to market turmoil.

The ECB’s new forecasts for inflation in the Eurozone, which were made before last week’s events, show a faster deceleration than last December’s forecasts, due to the big drop in energy prices. Specifically, at average annual levels, inflation is expected at 5.3% for this year, at 2.9% in 2024 and at 2.1% in 2025, which is also the medium-term reference horizon for the central bank’s decisions. In December, inflation was expected to be 6.3% for this year, 3.4% for 2024 and 2.3% for 2025.

The downward revision of inflation forecasts likely signals less need to adjust monetary policy. Lagarde said that based on those forecasts, if they are to be verified in light of the latest turmoil, “more ground” would have to be covered, implying that further interest rate hikes would be needed, while in previous interviews she had spoken of “a lot of ground » that had to be covered.

The question, therefore, is whether the turmoil will actually lead to any significant change in inflation forecasts, which in turn would change interest rate policy. If, for example, there is a significant fall in the stock markets and a climate of additional uncertainty, this could lead to a reduction in demand that would facilitate a reduction in inflation. This, however, is too early to assess as the crisis is very fresh and no one can know if it will escalate and to what extent or if it will “extinguish” after the interventions of the Fed and the Swiss central bank to provide liquidity.

Next Wednesday, the Fed will also announce its decisions on interest rates, which are also expected with great interest. Before the SVB default, investors expected the Fed to raise its key interest rate by 50 basis points (half a percentage point) to tackle inflation, but since then expectations are that the increase will be limited to 25 bps. The Fed rate today stands at 4.5% to 4.75%.