US Banking Troubles Bring Uncertainty to ECB’s Plans for Interest Rates
The US banking crisis could sway ECB from committing to future interest rate rises.
The recent collapse of Silicon Valley Bank (SVB) in the US due to sharp rises in interest rates has sent shockwaves through markets, with many concerned that financial instability risks could deter central banks from raising interest rates further. However, the European Central Bank (ECB) seems set on raising eurozone borrowing costs by half a percentage point at its governing council meeting in Frankfurt on Thursday.
ECB still expected to raise rates
Despite the recent banking crisis, most analysts believe the ECB will still raise its benchmark deposit rate to 3 percent but expect its rate-setters to be more reluctant to commit to another rise in May.
Holger Schmieding, the chief economist at German investment bank Berenberg, explains: “The ECB will not back away from the 50 basis point rate rise they plan to do this week. Instead, they will probably suggest there are more rate hikes to come without saying if they will be 25 or 50 basis points to give themselves time to see how this plays out.”
Risks to financial stability
The collapse of SVB has raised questions about whether financial stability risks will stop central banks from raising rates much further. The ECB has already announced its intention to raise borrowing costs, but there is concern that this could increase stress in parts of the financial industry.
Despite analysts suggesting that the problems in the US banking sector are unlikely to be replicated in Europe, the ECB is still checking lenders’ exposure to interest rate risk. The Bundesbank has convened a crisis team created after Lehman Brothers collapsed in 2008.
The collapse of SVB has revived fears that the sharp rise in borrowing costs could lead to financial instability. Last year, an ill-judged UK government budget sent bond yields soaring and forced the Bank of England to restart bond purchases.
Several European lenders suffered significant share price falls, including Spain’s Banco Sabadell and Germany’s Commerzbank, while the Stoxx banking index dropped 7 percent. In contrast, bond markets rallied, sending borrowing costs sharply lower, as investors sought the relative safety of government debt while reassessing how much further central banks would tighten monetary policy.
- The ECB announced in early February that it would raise borrowing costs.
- The collapse of SVB has led to concern about whether financial stability risks will deter central banks from raising interest rates further.
- Economist Frederik Ducrozet predicts that ECB President Christine Lagarde will “strike a hawkish but non-committal tone on Thursday.”
- Analysts think that the problems in the US banking sector are unlikely to be replicated in Europe.
While the ECB is still set on raising borrowing costs, it is expected to be more reluctant to commit to another rise in May, and the collapse of SVB has raised concerns about financial stability risks. As a result, the ECB will no doubt take a cautious approach, and the situation will be closely monitored over the coming weeks and months.
It remains to be seen whether the current banking crisis will have any long-term impact on the ECB’s plans to raise borrowing costs, but it is clear that financial stability risks are a concern for central banks, which could affect future interest rate decisions.