MNI ECB WATCH: Turmoil Raises Doubts Over 50Bp Guidance

The European Central Bank had been on course to raise its deposit rate by 50 basis points to 3% on Thursday in line with its guidance, but concern building over Credit Suisse in the wave of the collapse of Silicon Valley Bank has seen market rate expectations pared back sharply.

Earlier this week, policymakers had calculated that risks of contagion into Europe from SVB’s downfall were limited, which would allow them to remain focused on bringing inflation back to 2% in a “timely” fashion, but news that Saudi National Bank was not open to making a further capital injection into Credit Suisse sent market implied rates for Thursday down to 2.717% by 2 pm in London. (MNI SOURCES: ECB Clings To 50Bp Hike Plan Amid Market Turmoil)

Now the ECB faces the dilemma of whether to hike into market turbulence or take a hit to its inflation-fighting credibility if it raises rates by only 25 basis points, or even keeps them unchanged. A rates move could potentially be accompanied by steps to reassure markets over banks’ access to cheap funding.

EXTREME SCENARIO

ECB president Christine Lagarde said last month that it would require a “quite extreme” scenario to derail the Governing Council’s stated desire to hike “significantly at a steady pace,” with most analysts then predicting hikes of between 50 and 25bps points at every meeting until June, before a possible pause. Even doves accepted that a 50-basis-point hike was likely on Thursday, though they were pushing for weaker guidance as to future policy.

March’s Eurosystem staff growth and inflation projections will be central to discussions, with Eurostat flash estimates showing core inflation strengthened last month even as headline inflation dipped. But policymakers will be very aware of key data still to be published by June, and hawks will continue to point to rising wages and tight labour markets.

Having struggled with its communication in recent months, the ECB will be keen to avoid any missteps that could signal either a loss of determination to fight inflation - undermining its own credibility - or a lack of confidence in the financial system.

The ECB is also likely to face questions over its plans to reduce its portfolio of bonds, with Eurosystem holdings under its asset purchase programme set to decline by EUR15 billion a month until the end of June.