April 28, 2024
FRANKFURT, Germany (AP) — The European Central Bank carried through with a large interest rate increase Thursday, brushing aside predictions it might dial back as U.S. bank collapses and troubles at Credit Suisse feed fears about the impact of higher rates on the global banking system.
The central bank hiked rates by half a percentage point Thursday, underlining its determination to fight high inflation. In a statement, the bank called the banking sector in the 20 countries using the euro currency “resilient,” with strong finances.
It says it's “monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”
Bank President Christine Lagarde said last week that it was “very likely” the bank would raise its benchmarks by a half-percentage point, part of a series of rapid rate hikes aimed at getting inflation down from 8.5% — far above the bank’s target of 2%.
That was before Silicon Valley Bank in the U.S. went under last week after suffering losses on government-backed bonds that fell in value due to rising interest rates. Then, globally connected Swiss bank Credit Suisse saw its shares plunge this week and had to turn to the Swiss central bank for emergency credit.
The troubles at Credit Suisse dragged down the shares of stalwart European lenders such as Deutsche Bank, BNP Paribas and Societe General on Wednesday. Bank shares recovered Thursday.
Analysts say the share selloff was fed by investor fear that banks took added risks to increase investment returns during years of very low interest rates and some may have failed to safeguard themselves against those holdings turning sour as rates rise.
Similar questions are being raised about what the U.S. Federal Reserve will do at its rate meeting next week.
Fed Chair Jerome Powell said only last week that the ultimate level for rates would be “higher than previously anticipated,” leading some analysts to predict the Fed would raise by a half-point after slowing the pace to a quarter-point in February. Since then, expectations shifted back toward a quarter-point.
European finance ministers have said that their banking system has no direct exposure to the failures of Silicon Valley Bank and others in the U.S. Analysts say the European banking system instituted wide-ranging safeguards after the global financial crisis that followed the collapse of U.S. investment bank Lehman Brothers in 2008 and led to 600 billion euros in taxpayer-funded bailouts of European banks in 2008-2012.
The sweeping post-Lehman banking reforms enacted by the European Union forced banks to hold thicker financial cushions against losses and put the biggest banks under the watchful eye of the European Central Bank, taking them away from national supervisors who were considered to have turned a blind eye as problems built up at their home banks.
European banks also observe international rules that raised the amount of ready cash they had to keep on hand to cover deposits. Smaller U.S. banks were exempt from that rule; Silicon Valley was one of them.
