Caymans Post

A world within. A state apart.
Friday, Mar 29, 2024

The ECB was in a real bind over interest rates – but the Fed and Bank of England's task is slightly easier

The ECB was in a real bind over interest rates – but the Fed and Bank of England's task is slightly easier

Europe's monetary policy regulator could have sparked a big sell-off in European shares had it shied away from a 0.5 percentage points rise which the market had expected earlier this week.
The European Central Bank was in an incredibly difficult position ahead of today's interest rate decision.

Inflation in the eurozone is still running at 8.5% - more than four times the ECB's target rate - while the 'core' rate of inflation, which strips out volatile elements such as energy, food, alcohol and tobacco, actually rose from 5.3% in January to 5.6% in February.

Under those circumstances, markets had fully priced in a rise in the ECB's main policy rate from 2.5% to 3%.

Then came the collapse of Silicon Valley Bank, America's 16th largest lender, sparking turmoil in banking shares and equity markets initially in the US and then, during the last 48 hours, in Europe.

The headline act here was Credit Suisse, the accident prone Swiss lender, whose share price fell in Zurich by 24% on Wednesday.

The ECB, as a key player in the maintenance of financial stability in the eurozone, might then have been forgiven for pausing to take stock of the situation.

It has emerged that it has been informally asking some of the eurozone's major lenders during the last 48 hours about their exposure to Credit Suisse.

Rare and dramatic market moves

Accordingly, some market participants began reassessing the prospects of a half-point interest rate rise this week.

The market began to price in a quarter-point, not half-point, rate hike.

Nowhere was this more apparent than in the market for eurozone government bonds.

The yield - an implied borrowing cost - on two-year German government bonds plunged from 3.277% last Friday morning to as low as 2.373% this morning.

Similarly, the yield on two-year French government bonds slid from 3.1788% last Friday night to as low as 2.5080% on Wednesday afternoon.

These are dramatic moves the like of which are rarely seen in government bonds.

Little choice for an ECB in a bind

But the ECB was in a real bind.

Had it shied away today from a half-point rise, which the market had been expecting earlier this week, it might have prompted some market participants to wonder what the ECB knew about the stability of the eurozone banking sector.

It would probably have sparked a big sell-off in European equities.

So ECB President Christine Lagarde and her colleagues on the bank's rate-setting governing council probably had little choice but to press ahead with the rate rise everyone had been expecting from it until earlier this week.

Instead, they chose to nod to the upheaval in banking stocks in the accompanying statement, adding: "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 euro area banking sector is resilient, with strong capital and liquidity positions."

A dilemma to be faced by the US and UK

The dilemma faced by the ECB will be faced next week by both the US Federal Reserve and the Bank of England as they make their own policy decisions.

In some ways, their task is slightly easier than the one the ECB faced today, because both have been raising interest rates more rapidly than Mme Lagarde and her colleagues.

Yet in both countries, inflation - while slowing - remains well ahead of the Fed's and the Bank's target rates.

Under those circumstances one would expect the Fed to raise its main policy rate, Fed Funds, from the current 4.5-4.75% to 4.75-5% and the Bank to raise its main policy rate, Bank Rate, from 4% to 4.25%.

Both central banks, like the ECB, also have to weigh the battle against inflation against the risk of sparking a recession.

Jay Powell, the Fed chair, has been quite clear in the past that the Fed will not back off from sparking a recession if that is the price that needs to be paid for bringing inflation under control.

The Bank, on the other hand, may be persuaded to keep rates on hold and leave it for a few more weeks.
Newsletter

Related Articles

Caymans Post
0:00
0:00
Close
Paper straws found to contain long-lasting and potentially toxic chemicals - study
FTX's Bankman-Fried headed for jail after judge revokes bail
Blackrock gets half a trillion dollar deal to rebuild Ukraine
Israel: Unprecedented Civil Disobedience Looms as IDF Reservists Protest Judiciary Reform
America's First New Nuclear Reactor in Nearly Seven Years Begins Operations
Southeast Asia moves closer to economic unity with new regional payments system
Today Hunter Biden’s best friend and business associate, Devon Archer, testified that Joe Biden met in Georgetown with Russian Moscow Mayor's Wife Yelena Baturina who later paid Hunter Biden $3.5 million in so called “consulting fees”
Singapore Carries Out First Execution of a Woman in Two Decades Amid Capital Punishment Debate
Google testing journalism AI. We are doing it already 2 years, and without Google biased propoganda and manipulated censorship
Unlike illegal imigrants coming by boats - US Citizens Will Need Visa To Travel To Europe in 2024
Musk announces Twitter name and logo change to X.com
The politician and the journalist lost control and started fighting on live broadcast.
The future of sports
Unveiling the Black Hole: The Mysterious Fate of EU's Aid to Ukraine
Farewell to a Music Titan: Tony Bennett, Renowned Jazz and Pop Vocalist, Passes Away at 96
Alarming Behavior Among Florida's Sharks Raises Concerns Over Possible Cocaine Exposure
Transgender Exclusion in Miss Italy Stirs Controversy Amidst Changing Global Beauty Pageant Landscape
Joe Biden admitted, in his own words, that he delivered what he promised in exchange for the $10 million bribe he received from the Ukraine Oil Company.
TikTok Takes On Spotify And Apple, Launches Own Music Service
Global Trend: Using Anti-Fake News Laws as Censorship Tools - A Deep Dive into Tunisia's Scenario
Arresting Putin During South African Visit Would Equate to War Declaration, Asserts President Ramaphosa
Hacktivist Collective Anonymous Launches 'Project Disclosure' to Unearth Information on UFOs and ETIs
Typo sends millions of US military emails to Russian ally Mali
Server Arrested For Theft After Refusing To Pay A Table's $100 Restaurant Bill When They Dined & Dashed
The Changing Face of Europe: How Mass Migration is Reshaping the Political Landscape
China Urges EU to Clarify Strategic Partnership Amid Trade Tensions
Europe is boiling: Extreme Weather Conditions Prevail Across the Continent
The Last Pour: Anchor Brewing, America's Pioneer Craft Brewer, Closes After 127 Years
Democracy not: EU's Digital Commissioner Considers Shutting Down Social Media Platforms Amid Social Unrest
Sarah Silverman and Renowned Authors Lodge Copyright Infringement Case Against OpenAI and Meta
Italian Court's Controversial Ruling on Sexual Harassment Ignites Uproar
Why Do Tech Executives Support Kennedy Jr.?
The New York Times Announces Closure of its Sports Section in Favor of The Athletic
BBC Anchor Huw Edwards Hospitalized Amid Child Sex Abuse Allegations, Family Confirms
Florida Attorney General requests Meta CEO's testimony on company's platforms' alleged facilitation of illicit activities
The Distorted Mirror of actual approval ratings: Examining the True Threat to Democracy Beyond the Persona of Putin
40,000 child slaves in Congo are forced to work in cobalt mines so we can drive electric cars.
BBC Personalities Rebuke Accusations Amidst Scandal Involving Teen Exploitation
A Swift Disappointment: Why Is Taylor Swift Bypassing Canada on Her Global Tour?
Historic Moment: Edgars Rinkevics, EU's First Openly Gay Head of State, Takes Office as Latvia's President
Bye bye democracy, human rights, freedom: French Cops Can Now Secretly Activate Phone Cameras, Microphones And GPS To Spy On Citizens
The Poor Man With Money, Mark Zuckerberg, Unveils Twitter Replica with Heavy-Handed Censorship: A New Low in Innovation?
Unilever Plummets in a $2.5 Billion Free Fall, to begin with: A Reckoning for Misuse of Corporate Power Against National Interest
Beyond the Blame Game: The Need for Nuanced Perspectives on America's Complex Reality
Twitter Targets Meta: A Tangle of Trade Secrets and Copycat Culture
The Double-Edged Sword of AI: AI is linked to layoffs in industry that created it
US Sanctions on China's Chip Industry Backfire, Prompting Self-Inflicted Blowback
Meta Copy Twitter with New App, Threads
The New French Revolution
BlackRock Bitcoin ETF Application Refiled, Naming Coinbase as ‘Surveillance-Sharing’ Partner
×