ECB sets rate hike template as Fed opens liquidity tap

As global central bankers rolled out an emerging effort to firewall the necessary rate hikes to fight inflation, they calmed fears about financial stability. The European Central Bank (ECB) became the first mover and kept its focus on fighting inflation with a half-point rate increase. Meanwhile, the Federal Reserve said that banks had tapped a new liquidity facility for loans, and a group of large U.S. banks announced deposits to shore up confidence in mid-sized lenders.

The ECB Keeps Its Focus on Inflation

The ECB’s new policy statement and comments from officials acknowledged the concerns about bank stability while leading with the common refrain that “inflation is projected to remain too high for too long.” It suggested that financial stability is secondary to fighting inflation. According to European Central Bank president Christine Lagarde, the determination to fight inflation is as strong as ever. She also noted that this determination was set before the failure of Silicon Valley Bank (SIVB.O), further emphasizing the ECB’s belief that inflation is a bigger concern than financial instability.

Fed Addresses Market Tensions with Liquidity Facility

On the other hand, the Federal Reserve focused on addressing market tensions to provide liquidity to banks. Banks had drawn $152 billion from its standing loan window, while the new liquidity facility was tapped for $11.9 billion in loans. This move is meant to provide support and shore up confidence in U.S. mid-sized lenders.

Related Facts

Recent U.S. economic data has shown little reason for the Fed to declare victory over inflation, with consumer prices rising at a 6% annual rate. Although initial indications show a significant easing in hiring and wage growth, policymakers believe more is needed to cool inflation. Moreover, jobless claims fell below 200,000 for the week ending March 11, while February housing starts surged, showing unexpected strength in the sectors of the economy most sensitive to rising interest rates.

Key Takeaway

The decisions made by the ECB and the Federal Reserve indicated that they have different priorities. While the ECB’s priority remains inflation, the Fed’s priority is addressing short-term market tensions. However, it’s important to note that both banks are working hard to prevent a banking crisis and minimize its potential impact on the global economy.

Conclusion

The ECB has set a rate hike template that prioritizes inflation, which could lead to the bank continuing with rate hikes at its policy meeting next week, while the Fed has focused on providing liquidity to banks. The actions of both banks underline their commitment to preventing a banking crisis and minimizing its impact on the global economy.