Even though the U.S. failure of the Silicon Valley Bank has brought back concerns about financial stability, the European Central Bank is still likely to raise rates by another 50 basis points on Thursday.
As a result of the SVB crisis, European markets closed sharply down on Monday. On Thursday, people withdrew a lot of money from SVB, which led to a “bank run,” and regulators took over the bank on Friday.
Then, on Monday, HSBC agreed to buy the troubled U.S. tech startup-focused lender’s British branch for £1. On Monday, European banks experienced their worst trading day in more than a year due to fears of contagion, increased regulation, and general profit-taking.
This was the worst day for regional banks since March 4, 2022. Analysts don’t think that the turmoil will stop President Christine Lagarde and her Governing Council from raising rates this week.
In case you missed it, Vice President Joseph Biden just assured the public that the American financial system is safe by detailing the measures the government is taking to prevent the collapse of Silicon Valley Bank:
Sylvain Broyer, chief economist for EMEA at S&P Global Ratings, said in a note on Tuesday that the ECB still “has to fight an inflation problem that is becoming increasingly homegrown.”
In the euro area, inflation is still much higher than the ECB’s goal of 2%. The headline number for inflation in February was 8.5%, which was higher than the average estimate and only a little bit lower than January’s 8.6%.
Core inflation, which is the most important measure for policymakers right now, went up from 5.3% to 5.6%. This makes it more likely that the European Central Bank will have to keep raising the cost of borrowing.
Mark Wall with Deutsche Bank in a note to clients said (as reported by CNBC) –
“We recently raised our terminal rate forecast to 3.75% (50bp hikes in March and May and 25bp in June) and lifted the main landing zone for terminal to 3.50-4.00%”
“Beyond the near-term evolution of core and underlying inflation, which has yet to peak, the key determinants of the terminal rate – the level of the terminal rate, when it will be reached and how long it will be maintained – are wage growth, the fiscal stance and financial conditions.”
At the moment, the key rate of the ECB is 2.5%. Aside from that, people who follow the ECB also keep an eye on how divided the Frankfurt institution is about where its benchmark rate will peak.
Paul Hollingsworth, chief European economist at BNP Paribas, in a research note said (aforementioned) –
“We think the ECB will lack the consensus to explicitly commit to another 50bp move in May, given the visible divisions within the Governing Council on next steps.”
“Recent comments from council members suggest substantial differences over the extent and pace of future tightening.”
Within the 20 countries that share the euro, this division is again made along the classic line of “core” and “periphery.” Robert Holzmann, who is in charge of the Austrian central bank, recently came out and said that policy rates are not too high until they reach 4%.
Ignazio Visco, who is more cautious than Mario Draghi, didn’t like that. He said that he doesn’t “appreciate statements by my colleagues about future and prolonged interest rate hikes.”
On Thursday, the European Central Bank will also release an updated version of its staff projections for growth and inflation. Anatoli Annenkov, an ECB watcher with Societe Generale, in a note said –
“In its new staff forecasts, we expect the ECB to possibly raise its growth projections slightly for this year (weaker energy prices) and reduce it for 2024-25 (due to the policy tightening) while raising its core inflation forecast for this year and lowering its headline inflation forecast for this year and next (on the back of weaker energy prices).”
Our coverage of the uncertainty the Silicon Valley bank failure has created for the European Central Bank’s plans to raise interest rates has come to an end.