The European Central Bank (ECB) raised interest rates another half a point this Thursday, to 3.5%, despite the volatility in financial markets generated after the fall of the SVB and other North American entities last week. It is the highest level since October 2008, when the financial crisis became a global phenomenon. Frankfurt wants to show that he is in control, that he does not lose his temper, that he has a plan and there is nothing to fear. But just in case there was any doubt, he assures that if the proven solvency of financial institutions were not enough to allay misgivings among investors, “the ECB’s set of policy tools is fully equipped to provide liquidity support to the financial system in the area of the euro if necessary and to preserve the smooth transmission of monetary policy”.

Christine Lagarde had anticipated everything in the month of February, saying that only in the face of especially serious scenarios, which she could hardly imagine at the time, the plan would not be maintained. And despite the fact that investors seemed and seem to be discounting a turn of the wheel and perhaps a drop in the coming months, the institution has chosen to maintain the pace to try to tackle inflation. After several lurches in recent months on what is known as forward guidance, the body’s roadmap, experts have chosen not to surprise, not damage reputation and credibility, and not force a crisis of confidence when the inflation continues out of control and the first nerves are reaching depositors.

The institution, however, does not pronounce on the next steps. It does not confirm or deny that it will continue to raise rates, or at what rate. But not out of prudence or secrecy, but because it seems pretty clear that he doesn’t know. “It is not possible at this time to anticipate what the path will be from now on. It will depend on the data,” he pointed out at the press conference, acknowledging that the rise this Thursday was not unanimous. “There has been a large majority, but three or four members did not agree. Not because they disagreed with the principles, but because they preferred to have more data and have waited longer,” he explained.

At their meeting, the Governing Council also decided to raise the other two key ECB interest rates by 50 basis points. Consequently, the rate of the main refinancing operations and the rates of the marginal credit facility and the deposit facility will increase to 3.50%, 3.75% and 3.00% respectively, with effect from March 22, 2023. An orthodox answer, from the book, the most predictable and that a good part of the observers of the system consider reasonable. Perhaps they don’t support the strategy in general terms, but they believe that a surprise today would have had worse consequences.

The ECB is in a very difficult situation. Part of the basis that there are “disorderly and unjustified dynamics” right now. Raising rates by half a point should help, according to his calculations, to continue lowering prices towards the 2% goal that his mandate contemplates as soon as possible, but at the cost of suffocating activity a little more and not only to families and companies, but also potentially to financial institutions, very sensitive to the new monetary reality, as has been seen in the US. Not raising rates meant alleviating the situation of credits, mortgages and some balance sheets, but it also sent the market the feeling that something was wrong, which could generate more concern. And after the troubles being experienced by banks like Credit Suisse, which had to receive a desperate cape from the Swiss central bank on Wednesday night, there is no room for scares.

The market seemed to be pricing in a smaller rise, perhaps a quarter of a point, and that is why the yield on short-term bonds, such as the German, had plummeted the day before. And the market, as already happened in February, also seems to discount that we are surely facing the last rise, at least the last important rise, of that depth. What is clear now at least is that this forward guidance, in saying in advance what the next movements will be, is ruled out and that the Central Bank will make each decision month by month, based on the data, the news and the evolution of the prices.

The ECB now forecasts average inflation of 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025. At the same time, underlying price pressures remain strong. “Inflation, excluding energy and food, continued to rise in February and ECB experts expect it to average 4.6% in 2023, above what was forecast in the December projections,” says the body to justify the decision. of this month. “Subsequently, it is expected to fall to 2.5% in 2024 and 2.2% in 2025, as the upward pressures of previous supply crises and the reopening of the economy disappear and that a more restrictive monetary policy slows down each demand is growing,” says Lagarde’s team.

One of the main risks of this very aggressive interest rate policy, after 15 years with them at zero or negative rates, is a fragmentation in the Eurozone, that the differentials of some countries rise again and that the conditions for companies in the north and in the south become very different. Lagarde knows it, and his team, but they believe that the “monster” of inflation is the main threat and that cutting off its legs is well worth the risks and “pain” it causes. Even if there are doubts about the factors that drive that inflation.

The Governing Council assures in its decision today that it is “willing to adjust all its instruments within its mandate to ensure that inflation returns to its target of 2% in the medium term and to preserve the proper functioning of the transmission of the monetary policy The ECB policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed In addition, the Transmission Protection Instrument is available to counter disorderly and unjustified market dynamics which pose a serious threat to the transmission of monetary policy in all the countries of the euro area, which allows the Governing Council to fulfill its mandate of price stability more effectively”, concludes his message.

The Vice President of the ECB; Luis de Guindos, would have warned the finance ministers of the 27 last Tuesday, during the Ecofin, that some banks could be vulnerable in this environment, according to Bloomberg. Direct exposure to SVB is minimal, but no one is safe when doubts, fear and money start to move aimlessly very quickly.

Asked about it, the Spaniard said that “the European banking sector is very resilient, its capital levels are high, it has robust liquidity buffers and limited exposure. And I told the ministers the same thing.”

The president has spoken along the same lines when asked if she saw any type of systemic risk after the storm with Credit Suisse. “I was here in 2008 and I know the situation well. The euro zone banking sector is resilient, with strong capital and liquidity positions. We have reformed the framework, approved Basel III, increased capital ratios, coverage ratios The banking system is in a much stronger position than in 2008. Furthermore, if necessary we have the instruments available, always ready to be activated”, he concluded.

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