The European Central Bank is staying the course: The central bank is raising its interest rates by 0.5 percentage points as planned. After the latest developments on the financial markets, this can almost be regarded as a small sensation.
Christian Siedenbiedel
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The ECB deposit rate, which currently also plays an important role for savings rates, will thus be raised from 2.5 to 3 percent. This is the sixth rate hike in a row.
As the central bank announced on Thursday after the March meeting of the ECB Governing Council, the highest monetary policy body of the euro zone, it wants to continue the fight against inflation. Inflation in the euro area was last at 8.5 percent in February, after 8.6 percent in January. However, core inflation, i.e. inflation without strongly fluctuating prices such as energy and food, rose from 5.3 to 5.6 percent. This is the highest figure in the history of the European Monetary Union.
"In this difficult situation, the ECB is doing its job to stand up to stubborn inflation," commented Iris Bethge-Krauß, Managing Director of the Association of Public Banks in Germany: "Even in turbulent times, it demonstrates the necessary determination to limit the price level."
Rising fears of a financial crisis
Doubts about the determination of the monetary authorities had arisen in recent days, after the demise of the American Silicon Valley Bank, the large Swiss bank Credit Suisse had also got into difficulties – and had to cope with considerable price losses on the stock market. The question arose whether, in addition to other support for banks, it was necessary to refrain from raising interest rates in the euro area.
ECB President Christine Lagarde was faced with a difficult decision: did she want to risk going down in history in extreme cases as the head of the central bank who had quickly raised interest rates in an emerging financial crisis – or, on the contrary, did she want to be remembered as the central banker who had carelessly abandoned the goal of price stability in times of high inflation because of a little-known American bank?
Economists say that a central bank can face two dangers if a courageous intervention against inflation is actually required: it can take too much account of the budgetary situation of the states. Then we speak of fiscal dominance. Or else it takes too much account of the financial system and the banks. Then one speaks of financial dominance. The latter was precisely the concern.
To put it bluntly: If the banking system were to collapse, a low inflation rate would not help much – conversely, a central bank must be careful that there are not always any reasons not to make sufficient progress in the fight against inflation. The ECB and the US Federal Reserve are in a "quandary", said Frankfurt economics professor Volker Wieland: It is best to "tackle the problems of the banks quickly and convincingly without losing too much steam on the inflation front".
Struggle for the credibility of the central bank
Before the decision, the investment bank Goldman Sachs had expressed the expectation that the US Federal Reserve might now hold back on raising interest rates because of the bank quake – but the ECB would nevertheless raise interest rates and, if necessary, become somewhat more cautious about the outlook.
Clemens Fuest, President of the Ifo Institute, advocated that the ECB stick to the announced increase in key interest rates by 50 basis points: "If it were now to fall to about 25 basis points, this would bring some relief with regard to short-term financial stability. At the same time, however, it would send the signal that it believes we have a bigger problem here."
Carsten Brzeski, the German chief economist of the bank ING, had suggested on the short message service Twitter on Wednesday that the ECB could simply skip the press conference on the interest rate meeting altogether. In this way, it could potentially avoid further unwanted turbulence in the market.
The ECB was under some pressure to stick to the 0.5 percentage point rate hike. After all, it had already announced at the previous interest rate meeting that it intended to take such a step in March. In recent weeks, numerous members of the ECB Governing Council have called for such a courageous approach. Bundesbank President Joachim Nagel had said that if inflation proved to be so persistent, then monetary policy would have to be even more persistent. However, the head of the Italian central bank, Ignazio Visco, had opposed this at the end of last week and called for "prudence": "I therefore do not appreciate statements by my colleagues about future and sustained interest rate hikes."