First Republic Reaches Rescue Deal: Live Updates on Banks and the Stock Market

First Republic Reaches Rescue Deal: Live Updates on Banks and the Stock Market

The European Central Bank went ahead with a half-point increase in interest rates on Thursday, sticking to its previously stated inflation-fighting plan, but said recent turmoil in financial markets did not cement the path forward.

Since the collapse of three mid-sized banks in the U.S. in the past few days, investors have been concerned about other banks, including major Swiss lender Credit Suisse, and the sector’s ability to withstand higher interest rates. The European Central Bank was the first major central bank to set monetary policy since volatility began last weekend.

Policymakers are “closely monitoring current market pressures,” Bank President Christine Lagarde told a news conference on Thursday. “The Bank is ready to respond as necessary to protect price stability and financial stability in the euro area,” he added.

Despite the added uncertainty, policymakers have not deviated from the half-percentage-point rate they originally said would come in early February. The bank said it would raise its deposit rate to 3 percent on Thursday, the highest since October 2008.

“Inflation is forecast to remain very high for a longer period of time,” Ms Lagarde said, adding that the move was needed to ensure a “proper” return of inflation to the bank’s 2 per cent target. Bankers forecast inflation to average 5.3 percent this year and slightly above the 2 percent target in 2025.

It is not clear what will happen in the coming months. If the bank’s economic forecasts materialize after the current market uncertainty subsides, policymakers still have “a lot more ground” to tighten monetary policy, Ms Lagarde said. But if it is big.

Over the past few months, the central bank has kept its next interest rate target up for grabs as it shed light on the way forward for investors.

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The data used to make the projections were final in early March, before the latest market turmoil, so policymakers faced a high degree of uncertainty in their decision-making, Ms. Lagarde said.

“There was pre-existing uncertainty, but it’s certainly been amplified by the more recent financial pressures that we’ve seen in the last few days,” Ms Lagarde said. “It is difficult for the 26-member committee of the governing body to take a decision based on incoming economic and financial data,” he added.

“We strongly believe that this 50-basis-point rate hike is a solid decision,” he said, but then noted that a few policymakers needed more time to see how the situation unfolded.

In Frankfurt, European Central Bank officials met on Thursday. “It stands ready to respond as necessary to safeguard price stability and financial stability in the euro area,” the bank said.debt…Michael Probst/Associated Press

As financial markets were jittery this week, traders cut their bets on how much major central banks will raise interest rates this year amid worries about the collapse of California-based Silicon Valley Bank and Credit Suisse. Analysts have begun to speculate that the US Federal Reserve may not proceed with higher interest rates as expected, as markets jittery about the health of many banks, particularly US regional banks, and their ability to withstand higher rates.

Both the central bank and the Bank of England are scheduled to meet next week to set interest rates.

The eurozone has had no direct exposure to Silicon Valley banking, but banking concerns hit much closer to home on Wednesday when Credit Suisse’s share price fell to a record low after the Swiss bank said there was a “material weakness” in its financial reporting controls. The largest shareholder refrains from paying more funds for regulatory reasons.

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Earlier Thursday, Credit Suisse said it would buy back some of its debt by borrowing up to 50 billion Swiss francs, or about $54 billion, from Switzerland’s central bank. After hours, Credit Suisse’s shares soared as they closed nearly 20 percent higher in early trading.

The European Central Bank insisted on Thursday that it had the tools in place to safeguard financial stability in the region, but said the banking system was solid “with strong capital and liquidity positions”.

It is a new tool, the transmission protection tool, which was created over the summer and could be used to counter “unwanted, disorderly market dynamics” that threaten the central bank’s ability to implement its monetary policy decisions.

The central bank “combats the two problems of price stability and financial stability with two separate instruments,” Jörg Krämer, chief economist at Commerzbank, wrote in a note. There are good reasons for this, he added, because “the deep inflationary problem has not yet changed.”

He expects the bank to raise rates by a quarter-point each quarter at its next two meetings, taking the deposit rate to 3.5 percent, down from an earlier forecast of 4 percent. Market turmoil “could reduce bank lending – and thus growth and ultimately inflation,” Mr. Krämer added.

Ms Lagarde emphasized that future rate decisions would be “data dependent”, including financial data. The bank will be particularly cautious in lending to households and companies, if further restrictions appear and the extent to which financial conditions in the economy tighten.

European Central Bank President Christine Lagarde told reporters after the bank’s meeting in Frankfurt on Thursday: “It is not possible to decide now what the path forward is.debt…Heiko Becker/Reuters

Last month, policymakers at the ECB said they expected to raise rates by half a point at this week’s meeting as they remained committed to staving off sustained inflationary pressures even as inflation 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 and down from a peak of 10.6 percent in October.

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Beyond the headline rate of inflation for the eurozone as a whole, the details are too much for some policymakers. Some major economies, including France and Spain, reported higher inflation. Core inflation, which strips out volatile energy and food prices and is used to measure how embedded inflation is in an economy, rose last month.

Lower aggregate energy prices in Europe could help push inflation toward the central bank’s 2 percent target. But policymakers are focusing on so-called core inflation, which shows whether inflationary pressures are still building and making it harder to hit the inflation target on a sustained basis. Measures such as wage inflation and services inflation are closely watched, and current core inflation trends do not confirm that inflation is moving towards the target.

Regarding inflation, Ms. Lagarde said, “We are seeing some small improvements in some areas, but obviously not much.”

While markets are jittery and the extent of the impact on the banking sector still unknown, central banks have warned for months that higher-than-expected higher prices could persist, risking derailment from their inflation-reducing targets.

But Ms. Lagarde tried to push back against suggestions that the European Central Bank would prematurely declare victory in the fight against inflation. “We have not relented in our commitment to fight inflation,” he said. “There should be no doubt about it. The resolution remains.”


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