by Balazs Koranyi and Francesco Canepa

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FRANKFURT (Reuters) – The European Central Bank (ECB) raised interest rates by 50 basis points on Thursday, as it promised, prioritizing the fight against inflation despite concerns over stability of the global banking system that have disrupted financial markets.

Since July 2022, the ECB has raised its rates at an unprecedented pace, but the turmoil on the world markets for a week, triggered by the bankruptcy of the American bank Silicon Valley Bank (SVB), almost thwarted the institution’s strategy in its monetary tightening.

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As indicated in February, the ECB raised its deposit rate to 3.0%, its highest level since the end of 2008.

“Inflation is likely to remain too high for too long,” central bank president Christine Lagarde told a news conference, using the words of the statement.

“The Governing Council is closely monitoring the current tensions in the markets and stands ready to take the necessary measures to preserve price and financial system stability in the euro area”, she continued, adding that the banking sector had strong capital and liquidity positions.

No commitment has been made on a possible further rate hike, despite declarations from a long list of officials for greater measures in the fight against rising prices.

Christine Lagarde pointed out that it is currently impossible to determine the future path of interest rates in an environment of high uncertainty.

European bank stocks fell this week, under pressure first from the collapse of SVB and then from the setbacks of Credit Suisse, in the list of so-called systemically important banks.

The Swiss bank in difficulty, after having seen its share price drop, rebounded by 17.8% in Zurich thanks to the intervention of the Swiss central bank from which it will borrow up to 50 billion Swiss francs (50.7 Billions of Euro’s).

The main concern of the ECB is that monetary policy operates through the banking system, so that a major financial crisis would render its action ineffective.

The ECB therefore found itself faced with a dilemma: trying to control inflation or the need to maintain financial stability.

But Christine Lagarde pointed out that there was no compromise between these two missions and that the banking sector as a whole was in a “much, much stronger position” than at the time of the financial crisis of 2008.

Central bank vice president Luis de Guindos added that the euro zone’s exposure to Credit Suisse was “quite limited”.

Inflation is much higher than in previous crises and new ECB forecasts show that price growth could stay above its 2% target until 2025.

Signs showing that monetary tightening is having an impact on the economy are beginning to appear, said Christine Lagarde.

While systemic banking crises usually turn into severe recessions, the financial system is the best it has been in years, with capital, liquidity and profits at healthy levels.

Some economists have also argued that the ECB has plenty of instruments to combat market stress and therefore did not need to sacrifice its planned rate hike to keep financial assets strong.

This point of view was reflected in the press release from the institution, which said it had “a full panoply of monetary policy instruments enabling it to support, where necessary, the liquidity of the euro area financial system and to preserve the smooth transmission of monetary policy”.

On the stock market, the Stoxx banking index gained ground after the ECB’s announcements and took 1% around 3:20 p.m. GMT.

On the bond market, the yield on ten-year German government bonds, the benchmark for the entire euro zone, rose to more than 2.2%.

The euro gained 0.24% to 1.06 dollar, close to its level before the announcements of the Board of Governors.

(Report Balazs Koranyi and Francesco Canepa, Laetitia Volga, edited by Blandine Hénault)

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