Source: Koyfin
For the past few months, the central bank has been pre-announcing the way ahead for rates, committing to its next interest rate move in advance. But on Thursday, the bank was less certain about its next step as it weighs the impact of past tightening on the economy and inflation.
Forward guidance on rates was not provided and the reaction to the current financial market turmoil was that the European banking sector is resilient, the higher rates are not a threat to the financial stability, and that the ECB is ready to “respond as necessary”.
The dropping of forward guidance is a significant shift from the ECB’s previous messaging, coming in a week when global financial markets have been shaken by the collapse of three U.S. banks. This combined with the growing awareness that the tightening so far could have adverse effects, raised hopes among investors that Thursday’s meeting could mark the final phase of the ECB tightening.
The latest move brought the deposit rate to 3% which is the highest level since late 2008.The ECB said that “Inflation is projected to remain too high for too long,” and that the rate hike was needed to ensure the return of inflation to the central bank’s target of 2%.
The bank forecasts that inflation would average 5.3% in 2023 and still be slightly above target in 2025. Also, the ECB raised its growth forecasts for the bloc, and now sees GDP growth of 1% this year. The forecasts for 2024 and 2025 were also revised up; however, given they were finalised before the collapse of the three U.S. banks they are subject to a higher degree of uncertainty than usual.
European officials stressed that the situation in Europe is different than in the United States. In Europe there is less deposit concentration, unlike SVB which was an important lender to the tech and biotech sectors. Deposit flows in Europe appear stable, and European banks are well capitalized following the regulatory changes after the global financial crisis. >/p>
