The European Central Bank (ECB) announced on Thursday that it is raising its key lending rate by 50 basis points. This decision defies market forecasts, which had predicted that the region’s simmering banking crisis would prompt a pause in the ECB’s inflation fight.
The crisis was triggered in part by the failure of Silicon Valley Bank and accelerated by solvency issues at Credit Suisse, according to Bellingham Herald
European Central Bank Monitoring
The ECB 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 bank also dropped previous references to where it sees future rate hikes, indicating decisions will now be more data-dependent. Nonetheless, given that “inflation is projected to remain too high for too long,” the European Central Bank lifted its benchmark refinancing rate by 50 basis points, to 3.5%, while adding similar increases to its margin lending and deposit rates.
“The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions, which will be determined by its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission,” the European Central Bank said in a prepared statement.
The move now puts next week’s Federal Reserve policy meeting in stark focus. Traders are speculating as to whether Chairman Jerome Powell will take his foot off the gas in terms of near-term rate hikes while the banking sector concerns work themselves through, or carry on with his “higher-for-longer’ messaging amid the country’s stubbornly-high inflation rates.
Powell was offered little assistance in his inflation fight on Thursday, as weekly jobless claims fell by 20,000, a much larger-than-expected decline that took the overall tally to just 192,000. February housing starts were also hot, rising 9.8% to an annualized rate of 1.45 million.
The CME Group’s FedWatch is now indicating a 21% chance that Chairman Jerome Powell will hold rates at between 4.5% and 4.75% next week in Washington, with the bulk of wagers suggesting rates will ultimately peak at below 5% later in the spring.
The CBOE Group’s VIX index, a key volatility benchmark, slipped 7% in the early trading session to 24.28 points suggesting traders see daily swings on the S&P 500 of around 60 points, or 1.5%, over the near term.
Benchmark 2-year Treasury note yields were marked 9 basis points higher from last night’s levels at 4.095% in New York trading, with 10-year paper pegged at 3.455%. The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.21% lower at 104.395.
“The implications for the Fed’s meeting next week suggests that the Fed will raise rates 25 basis points based on futures probability, but will make it clear that the stability of the banking system remains strong,” said Quincy Krosby, chief global strategist for LPL Financial in Charlottesville, Virginia.
“However, should there be further deterioration within the regional banks, or another blowup, the Fed may consider a pause,” she added.
“At this stage, both the European Central Bank and Fed are trying to find a viable balance between price stability and financial stability.”
On Wall Street, the S&P 500 was marked 36 points lower in the opening hour of trading, flirting with the negative territory for the year, while the Dow Jones Industrial Average booked a 120-point advance. The tech-focused Nasdaq was up 170 points.