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The European Central Bank pushed ahead with a half-point increase in interest rates on Thursday, sticking to its previously stated plan, but said the recent turmoil in financial markets had made the path ahead much less certain.
The central bank said in a statement that its policymakers were “monitoring current market tensions closely” and the bank “stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”
For the past few months, the central bank has been lighting the way ahead for investors, committing to its next interest rate move in advance. But on Thursday, the bank was less clear about the next step as it determines the impact of past tightening on the economy and inflation.
“The elevated level of uncertainty reinforces the importance of a data-dependent approach” to policy decisions, the statement said.
The bank raised its deposit rate to 3 percent, the highest since October 2008.
“Inflation is projected to remain too high for too long,” the bank said, adding that the move was needed to ensure the “timely” return of inflation to the bank’s 2 percent target. The bank’s staff forecast that inflation would average 5.3 percent this year and still be slightly above target in 2025.
As financial markets convulsed this week, traders reduced their bets on how high the major central banks would raise interest rates this year since the collapse of Silicon Valley Bank in California and worries about the big Swiss lender Credit Suisse. Analysts have started to speculate that the U.S. Federal Reserve won’t be able to proceed as expected with higher interest rates as markets remain jittery about the health of many banks, particularly U.S. regional ones, and their ability to withstand higher rates.
The eurozone has little direct exposure to Silicon Valley Bank, but banking worries got much closer to home on Wednesday, when Credit Suisse’s share price plunged to a record low after the Swiss bank said it found “material weakness” in its financial reporting controls, and its largest shareholder balked at injecting more funds for regulatory reasons. Early on Thursday, Credit Suisse said that it would borrow up to 50 billion Swiss francs, or about $54 billion, from Switzerland’s central bank and buy back some of its debt. Hours later, shares in Credit Suisse jumped about 20 percent when trading began.
The European Central Bank stressed in its statement on Thursday that it has tools to protect financial stability in the region but said that the banking system was “resilient, with strong capital and liquidity positions.”
It highlighted a new tool that it created last summer, the transmission protection instrument, that could be used to counter “unwarranted, disorderly market dynamics” that threatened the central bank’s ability to implement its monetary policy decisions.
On interest rates, “it’s not possible to determine at this time what the path will be going forward,” Christine Lagarde, the president of the European Central Bank, said in a news conference later in Frankfurt.
But if the current market uncertainty waned and the economy progressed as the bank expects then policymakers still have “more ground to cover,” she added.
Last month, policymakers at the E.C.B. said that they expected to raise rates by half a point at this week’s meetingbecause they were committed to stamping out persistent inflationary pressures even as the inflation rate appeared to have peaked. Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 8.5 percent in February, down slightly from January’s rate, and down from a peak of 10.6 percent in October.
Looking beyond the headline rate of inflation for the eurozone as a whole, the details were more concerning to some policymakers. Some major economies, including France and Spain, were reporting higher inflation rates. Core inflation, which strips out volatile energy and food prices and is used to measure how embedded inflation is in an economy, also rose last month.
Lower wholesale energy prices in Europe will help push inflation toward the central bank’s 2 percent target. But policymakers are focused on so-called underlying inflation, which will show whether inflationary pressures are still building and make it hard to meet the inflation target on a sustainable basis. Measures such as wage inflation and services inflation are being watched closely.
As the central bank restricts monetary policy more tightly and gets closer to halting rate increases, there are growing signs of division among the 26-member Governing Council.
Last week, Ignazio Visco, the governor of the Bank of Italy, publicly criticized his fellow policymakers who had been expressing their views about where interest rates might go.
“We have agreed to decide ‘meeting by meeting,’ without ‘forward guidance,’” he said. “This is why I don’t appreciate statements made by my colleagues on future and extended increases in interest rates. I don’t, we don’t, know enough.”