ECB faces dilemma over interest rate rise amid Credit Suisse crisis
The European Central Bank is facing a dilemma over whether to push ahead with its plans for a large interest rise on Thursday amid fears over the strength of the banking system after Wednesday’s heavy sell-off of the Swiss banking giant Credit Suisse.
After raising interest rates since last summer at a record pace to tackle high inflation across the eurozone, the ECB had effectively committed to another 0.5 percentage point increase in borrowing costs this week.
However, financial markets have drastically cut back expectations for the central bank to push ahead with the plan. Before the rate decision on Thursday afternoon, trading in markets reflected an almost 50-50 chance that the ECB would go ahead with a 0.5 percentage point rise. Previously it was considered a certainty.
Analysts said the central bank could opt for a smaller 0.25 percentage point rise as concerns over the health of the banking system ripples through markets. It comes after the collapse of Silicon Valley Bank in the US rattled global banking shares earlier this week, stoking fears of a rerun of the 2008 financial crisis, and leading global investors to tear up their expectations for central bank rate increases.
Victoria Scholar, the head of investment at Interactive Investor, said: “Last week, a 50-basis point hike was almost an inevitability. However, the collapse of SVB and Credit Suisse’s turmoil have seen markets wind back their ECB expectations.
“Financial markets are now pricing in an increased chance of a 25-basis point hike, but whether the SNB’s support for Credit Suisse could embolden the ECB to continue with its hawkish path is yet to be seen.”
The ECB’s rate decision comes as European markets recovered from a dramatic sell-off on Wednesday,
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