BUSINESS Market turmoil tests ECB rate hike appetite


Market turmoil tests ECB rate hike appetite


19:03, March 16, 2023

The ECB will Thursday become the first major central bank to meet since markets were rocked by banking crisis fears, testing the eurozone institution's resolve to implement another hefty rate hike.

The European Central Bank (ECB) headquarters building is pictured in the cityscape ahead of the start of the press conference on the eurozone's monetary policy following the meeting of the governing council of the ECB in Frankfurt am Main, western Germany on February 2, 2023. (File photo: AFP)

Investors say the European Central Bank should reconsider its plans following the collapse of Silicon Valley Bank and Signature, the sector's biggest failures since the 2008 financial crisis.

Fears of contagion have spread to Europe, with a market rout forcing Credit Suisse to tap on a financial lifeline from the Swiss central bank.

After seeing its stocks in freefall on Wednesday, Switzerland's second biggest bank, already battling multiple scandals, sought to stave off the latest crisis by announcing it would borrow up to $53.7 billion from the country's central bank.

Its shares soared more than 30 percent at the open Thursday, and European stocks rebounded.

Since 2021, Credit Suisse has faced problems ranging from the bankruptcy of British financial firm Greensill, in which some $10 billion had been committed, to the implosion of US fund Archegos, which cost it more than $5 billion.

Its annual report this week acknowledged "material weaknesses" in internal controls.

- ECB's 'difficult task' -

The turmoil has triggered uncertainty as to whether the ECB will stick to its plan to implement a half-percentage-point hike, as widely expected, as it battles high inflation or hold off for fear of worsening the situation.

"The ECB has the difficult task to be the first major central bank to decide what to do amid the banking crisis," said Ipek Ozkardeskaya, analyst at Swissquote Bank.

"Its decision could change the expectations for other central banks."

The US Federal Reserve and Bank of England hold meetings next week.

SVB's demise was precipitated by the US Federal Reserve's own rate-hike campaign, which brought down the value of bonds with lower returns that the California bank held, causing it to lose $1.8 billion.

Neil Shearing, from Capital Economics, predicted "a tussle" between interest-rate hawks and doves at Thursday's meeting of the 26-member ECB governing council.

"The outcome will ultimately be decided by a 'swing' group of policymakers... if they judge that the financial risks are contained, it's still possible that policy rates are raised," he said.

Some analysts predicted rates may still be raised, but less than earlier expected, with the ING analysts suggesting the Frankfurt-based institution could downshift to a 35 basis point increase.

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