The Council of the European Central Bank continues to significantly tighten monetary policy despite the turmoil in the financial markets.
On Thursday, it decided to raise the most common key interest rate, i.e. the deposit rate of commercial banks, to three percent. The interest rate will rise by half a percentage point, just as the bank has said before.
At the same time, the ECB’s other two key interest rates, i.e. the interest rate on the ready-to-pay credit and the interest rate on basic financing operations, will also rise by half a percentage point.
The reason is still rapidly rising consumer prices.
– Inflation is predicted to remain too high for too long, the ECB says in its announcement.
The decision was one of the ECB’s most significant in months. In addition to inflation, the central bank’s problem is the looming banking crisis. Investors and analysts in the market they believed (you switch to another service) in advance, that the ECB would not dare to raise the interest rate in this situation.
– The ECB Council is closely monitoring the current market tensions and is ready to react if necessary in order to maintain price and financial stability in the euro area, the release states.
The banks’ uncertainty also affects the future monetary policy, but how, we will hear about it in the CEO’s meeting starting at 3:45 p.m. Christine Lagarde at the press conference. You can follow the info directly from the video above.
The interest rate decision affects, for example, the most common reference interest rate for Finnish home loans, i.e. the 12-month Euribor. Euribor has fallen again in the last few days, as last week it was quickly moving towards the four percent limit.
“European banks in good shape”
The central bank is between a stick and a stick. Excessively raising interest rates can contribute to the emergence of a banking crisis.
The banking industry has been busy this week. The US bank Silicon Valley Bank fell into the arms of the authorities over the weekend, and this week the problems of the Swiss bank Crédit Suisse have weakened the stock prices of European banks.
On the other hand, the ECB’s interest rate hikes so far can be considered insufficient, because inflation has not been curbed. The European Central Bank’s number one task is to keep the rise in prices under control and limit it to around two percent.
Now the ECB is raising its estimate of this year’s inflation. In its interest rate policy, it mainly monitors base inflation, which has been stripped of rapidly fluctuating energy and food prices.
In its announcement on Thursday, the central bank estimated that the banks of the euro area are in good shape.
– Eurozone banks are solvent and are well able to cope with their payment needs.
However, the central bank assures that its “toolbox is fully equipped” to provide liquidity support to the euro area financial system.
Already at their last monetary policy meeting, the central bankers said that the interest rate will be raised by half a percentage point in March. CEO Lagarde repeated the plans in an interview with in February in Saariselka.
In terms of Euribor development, what CEO Lagarde says at the soon-to-be-started press conference is also important.
– There is uncertainty in the market about how the central bank will react to market turbulence, OP Financial Group’s senior market economist Jari Hännikäinen says.
Although Switzerland is not part of the eurozone, the banks are interconnected and difficulties are transmitted through the market.
From Lagarde’s speech, Hännikäinen expects more information about what the situation is in the banking sector in the euro area, what kind of risks there are and how the risks are managed, as well as how the ECB plans to handle the turmoil in the banking sector.
In addition, the ECB must show that it is serious about fighting inflation, says Hännikäinen.
How to support banks
When the central bank has raised interest rates, the values of debt securities on banks’ balance sheets have collapsed. They have been acquired in bank vaults to secure funding at a time when interest rates were lower than today.
Now, the resale value of the bonds has collapsed, when there are more profitable, i.e. higher-interest, investment targets available on the market. As long as the banks don’t have to sell them, there’s no problem. If, on the other hand, banks suddenly need cash, they may be forced into the lira.
The ECB has the means to ease the possible plight of banks. Later this spring, for example, it may specify its support programs for commercial banks, which it has created since the financial crisis.
What thoughts does the rise in interest rates evoke? You can discuss the topic below until Friday 17.3. until 11 p.m.
Listen to the news podcast below about where the banks’ problems started.