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London(CNN) The European Central Bank (ECB) stuck with its plan to hike interest rates by half a percentage point Thursday, judging that inflation poses a bigger immediate threat to the economy than turmoil in the banking sector.
“The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” the ECB said in a statement.
“The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”
The move will take the benchmark rate across the 20 countries that use the euro to 3%. The central bank has now hiked rates at six consecutive meetings since July in a bid to get inflation under control.
“Inflation is projected to remain too high for too long,” the ECB said, adding that core inflation — excluding volatile energy and food prices — continued to increase in February.
At 8.5%, inflation in the euro area last month was far above the ECB’s 2% target. And data Wednesday showed a stronger than expected increase in industrial production across the 20 countries that use the euro.
Inflation versus market turmoil
But some analysts had expected the central bank to opt for a smaller hike of 25 basis points to balance inflationary pressures against the risk of adding further stress to markets, which remain jittery following a rout of Credit Suisse shares Wednesday.
Also, the fallout from the demise of Silicon Valley Bank could lead other banks to adopt a more cautious approach to lending. That would weigh on economic growth and inflation, reducing the need for rate hikes.
The ECB’s decision “is a test of the conundrum facing central banks,” Adam Hoyes, an economist at Capital Economics, said in a note Wednesday.
“There are still huge uncertainties about what might happen next, but central banks … will now have to factor in the risk that the current situation snowballs into a broader loss of confidence in the banking system and a significant tightening in financial conditions,” he added.
Banking stocks sold off sharply Wednesday, as concerns about the sector’s resilience in the wake of SVB’s demise spread beyond the United States.
The selloff, which dragged Credit Suisse to a new record low, culminated in the embattled lender accepting a $53 billion loan from Switzerland’s central bank. The lifeline calmed panicked investors and boosted bank stocks Thursday.
Attention will now turn to the ECB press conference due to kick off at 9.45 a.m. ET. ECB President Christine Lagarde will have to reassure investors that no major euro area bank is in the same situation as Credit Suisse, and that it has their back.
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