MNI ECB WATCH: Rates Up 50Bps With 'Ground To Cover' - Lagarde

The European Central Bank raised interest rates by 50 basis points on Thursday, saying more hikes would be needed if markets stabilise and that it saw no trade-off between ensuring price stability and financial stability.

However, heightened levels of uncertainty following the collapse of Silicon Valley Bank and the Swiss National Bank’s decision to support Credit Suisse, led the ECB to move away from explicit rates guidance, and to say that future decisions would be made meeting-by-meeting.

“If our baseline was to persist as the uncertainty reduces we know we have a lot more ground to cover, but it’s a big caveat if the uncertainty continues to reduce," ECB president Christine Lagarde said. (see MNI SOURCES: ECB Clings To 50Bp Hike Plan Amid Market Turmoil).

Future rates decisions will be tied to the inflation outlook, underlying inflation dynamics and the strength of monetary policy transmission, she said.

“We don’t see any trade-off between price stability and financial stability,” Lagarde said. “They inform each other, but we handle them separately.”

The ECB stands ready to use any and all the tools at its disposal if required to support banks, although she said there was no need “at this point in time to explore any alternatives to the tools we have,” she said, insisting that Europe’s banks remain strong.

TPI

Financial market tensions could potentially be a reason to activate the ECB’s still-untested Transmission Protection Instrument, which would buy the bonds of weaker eurozone states if they came under market pressure.

“We have not yet had to decide whether financial tensions could qualify in that respect, though it could well be the case,” Lagarde said.

Policymakers have also yet to agree on whether the pace of quantitative tightening - in the form of partial reinvestment under the APP - may need to be slowed. (see MNI INTERVIEW: ECB Still Set For 5% Rate Peak - Wyplosz).

The decision to press on with a 50bps rate hike - not 25bps as some analysts anticipated - was agreed by a “very large majority,” with only three or four members in favour of adopting a slower pace, MNI understands. (MNI POLICY: ECB Dissenters Looked For Hold, Not Smaller Hike)

March’s Eurosystem staff growth and inflation projections saw headline inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. Core inflation is expected to average 4.6% in 2023, 2.5% in 2024 and 2.2% in 2025, while growth is seen at 1% this year and 1.6% for each of the next two years