There are no non-European banking crises that hold. We continue with the increase in rates: according to the president of the ECB Christine Lagarde fighting inflation at home is more important than the fibrillations of euro area banks, which are better supervised than their US counterparts.
The ECB has thus decided to raise i interest rates di half a percentage point as it was in the forecasts before the turbulence that is affecting the banks took place, bringing the rate on the main refinancing to 3,50%, that on deposits at 3%, and that on marginal loans at 3,75%.
Some expected Frankfurt to be more cautious given widespread and potentially persistent instability should the Credit Suisse case escalate. But the central institution has also seen itself tight on another front: inflation remains high, it has spread to the whole economy and we cannot risk loosening our grip right now by sending less decisive messages. However, says the Governing Council in the note, "it is closely following the tensions underway on the markets and is ready to intervene where necessary to preserve price stability and financial stability in the euro area".
The Milan Stock Exchange, after reacting with an initial decline to the decision, is attempting a recovery. Around 1530 the Ftse Mib index limits losses to 0,8%, while the spread drops to 187 (-2,46 bp). The single currency briefly rallied above 1,06 on the greenback before slipping to 1,058, down 0,1%.
The European banking sector is stronger and more supervised
The eurozone banking sector is a strength for the ECB. As noted, it is "resilient, with strong capital and liquidity positions." In any case, Frankfurt states that "it has all the necessary tools to provide liquidity to support the euro area financial system, should the need arise, and to preserve the orderly transmission of monetary policy".
The underlying dynamics of inflation are still worrying
According to the central institute, “inflation should remain too high for too long a period of time. Therefore, the Governing Council decided today to raise the three rates by 50 basis points”, in line with its determination to ensure the timely return of inflation to the 2% target over the medium term”. “The high level of uncertainty increases the importance of an approach based on data for the decisions of the Governing Council”, which “will be determined by its assessments of the inflation prospects in the light of the new economic and financial data, by the dynamics of underlying inflation and by the intensity of monetary policy transmission”, he continues.
What is worrying are the new price estimates, completed in early March, i.e. before the recent tensions on the financial markets. "These tensions therefore lead to further uncertainty regarding assessments of the baseline scenario for inflation and growth", explains the ECB. Indications see general inflation averaging 5,3% in 2023, 2,9% in 2024 and 2,1% in 2025. At the same time, however, “the underlying pressures on prices remain intense. Inflation excluding energy and food continued to increase in February" and an average of 4,6% is expected in 2023, a higher level than that anticipated in the December projections". Subsequently, it is noted, “it is expected to reduce to 2,5% in 2024 and 2,2% in 2025, as the upward pressures deriving from past supply shocks and the reopening of economic activities fade and the more restrictive monetary policy will increasingly slow down demand”.
The decision is also supported by robust economic growth prospects
Moreover, in support of the policy decided by Lagarde there are also the prospects of one robust growth. In fact, Frankfurt says: “the projections for growth in 2023 were correct upwards in the baseline scenario, reaching an average of 1,0% due to both the drop in energy prices and the greater resilience of the economy to the difficult international context”. Furthermore, ECB experts expect "growth to increase further to 1,6% in both 2024 and 2025, supported by the strength of the labor market, the improvement in the climate of confidence and the recovery of real incomes". Those for next year and 2025, however, are lower estimates than those for December.
Meanwhile, Switzerland and the USA are running for cover. de Guindos' doubts
Meanwhile, the Swiss federal council, the executive body of the government of the Swiss Confederation, held today a extraordinary meeting about the situation in which Credit Suisse finds itself. This was reported by the Swiss financial press agency Awp, specifying that it is not clear whether decisions will be taken today.
From Use, according to the advances of her written statements reported by the New York Times, the secretary of the Treasury Janet Yellen reassures the Senate that "the US banking system remains robust and that Americans can feel confident that their deposits will be there when they need them." "This week's actions demonstrate our unwavering commitment to ensuring that depositors' savings remain safe," he said in relation to the crash of two US regional banks.
Meanwhile, during the Ecofin, according to Bloomberg, the vice president of the ECB Luis de Guindos he stressed that sudden rate hikes could have implications for the portfolios of credit institutions in the euro area.
No indication on the ECB's next moves
After the first quarter of 2023, the discussion on what to do for the second and for the rest of the year will begin. And if anything, one could think of a slowdown. But today, unlike other times, it was not provided no indication for the next hikes. The Northern front will continue to push for more powerful tightening, citing the single mandate of the ECB, namely the preservation of price stability. But if further vulnerabilities emerge among eurozone lenders, then the side of more cautious central bankers could take over.
