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In light of the recent upheaval in the financial services industry, the European Central Bank (ECB) decided to increase interest rates by another 50 basis points on Thursday, sending a message that it is prepared to provide additional liquidity to financial institutions if this becomes necessary.
ECB Announces 50 BPS Rate Hike
As a result of continued inflation that is far higher than the level that is intended, the European Central Bank (ECB) has been sending signals for some weeks that it plans to raise interest rates once more at its meeting in March. The preliminary statistics collected in February indicated that headline inflation was 8.5%, which was significantly higher than the goal inflation rate of 2% set by the central bank.
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In its official statement, the ECB was quoted as saying:
Inflation is projected to remain too high for too long. Therefore, the Governing Council today decided to increase the three key ECB interest rates by 50 basis points.
“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 central bank further stated in the same statement.
Banking Issues & Growing Inflation
The banking industry has been facing significant challenges since last week, when authorities in the United States determined that Silicon Valley Bank was insolvent. The occurrence caused the bank’s international subsidiaries to fail and sparked worries about whether or not central banks are hiking interest rates at an aggressive pace.
Additionally, the ECB updated its forecast for future inflation on Thursday. The current forecast predicts annualized headline inflation at 5.3% for this year, followed by 2.9% in 2024. In December of last year, the bank’s inflation projection for 2023 and 2024 came at 6.3% and 3.4% respectively.
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