Summary: Given recent turbulence in the financial services industry, the European Central Bank (ECB) decided on Thursday to raise interest rates by another 50 basis points, indicating that it is prepared to provide additional liquidity to financial institutions if necessary.
Due to persistently high inflation levels far above expected levels, the ECB has been signaling for weeks that it plans to raise interest rates again at its March meeting. Preliminary statistical data collected in February showed an overall inflation rate of 8.5%, well above the target inflation rate of 2% set by the central bank.
In its official statement, the ECB was quoted as saying:
"Inflation rates are expected to remain elevated for too long a period of time. Therefore, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points."
In the same statement, the central bank further noted that "the Governing Council is closely monitoring the current market tensions and is ready to take necessary action at any time to safeguard price stability and financial stability in the euro area."
Additionally, the ECB updated its forecast for future inflation on Thursday. The current forecast is for an annualized total inflation rate of 5.3% this year, followed by 2.9% in 2024. In December of last year, the bank's inflation forecasts for 2023 and 2024 were 6.3% and 3.4%, respectively.
Commentary: The banking industry has been facing significant challenges since last week when US regulators determined that Silicon Valley Bank had gone bankrupt. This event led to the collapse of the bank's international subsidiaries and raised concerns about whether central banks around the world would raise interest rates at an aggressive pace.
At that time, the general market consensus was that the Fed would slow down its rate hike and could even slow down its rate hike action. But now that the European Central Bank has insisted on a 50 basis point rate hike, the Fed's strong willingness to raise interest rates seems to have revived, exacerbating market panic.
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