‘Persistent’ inflation outweighed fears of banking turmoil in ECB rate hike move

Most rate setters at the European Central Bank pushed to separate concerns about turmoil in the banking sector from their efforts to control inflation by raising interest rates when they met last month.

He outcome of last month’s ECB meetingwhich came less than a week after the collapse of Silicon Valley Bank and just a couple of days before Credit Suisse was pushed into the arms of rival UBS, underscored how concerns about high inflation remain paramount among those who fix the cups.

Some ECB lawmakers cited the “separation principle” to argue that monetary policy should be assessed independently of financial stability risks before going ahead with a widely expected half percentage point rate hike, according to the ECB meeting report. March 16 posted on Thursday.

“Unless the situation deteriorates significantly, financial market stress is unlikely to fundamentally change the governing council’s assessment of the inflation outlook,” the ECB said. “In light of the risk of persistent inflation dynamics, the ECB’s monetary policy also had to be persistent.”

Since then, several members of the ECB’s rate-setting governing council have said they hope the keep raising rates at its next meeting on May 4, while adding that it could slow the pace to a quarter percentage point increase depending on data to be released in the next two weeks.

There was also skepticism among several council members at the March meeting that their forecasts of a steady decline in inflation in the coming years were too optimistic. Some said his forecast that price growth would fall from an average of 5.3 percent this year to 2.1 percent in 2025 “gave the impression of ‘immaculate disinflation.’”

Skeptics pointed out inflation figures higher than expected in February and said that “the strengthening of wage growth was consistent with the second-round effects that had already begun.” They cited various “risk factors” that could keep inflation high, including generous fiscal policy by eurozone member states, which bolster the case for further rate hikes.

After last month’s meeting, ECB President Christine Lagarde said she had “without compensation” among its objectives to maintain financial stability and raise rates to reduce inflation. He also said rates are likely to rise if the ECB’s core inflation forecast is not affected by the turmoil in the banking sector.

There were a handful of dissenters among the 26-member council, who called for a pause on rate hikes to assess the impact of the banking sector’s woes.

They argued that “the risks of not raising rates, should the stresses prove to be short-lived, were assessed as much less severe than the risks associated with raising rates in a persistent crisis.” But they were outnumbered by those who wanted to raise rates.

Andrew Kenningham, an economist at research group Capital Economics, said the ECB report on the March meeting “confirms that it was only the turbulence in the banking sector that deterred authorities from announcing further rate hikes.” He added that since bank failures “have now subsided,” he would continue to raise rates, forecasting his deposit rate to rise from 3 percent to a high of 4 percent in the coming months.

Elizabeth Schnabel, a ECB An executive board member said in a speech Wednesday that the added complexity created by the recent banking melee made it impossible for him to say what he would do in future meetings.

but schnabel data presented showing that “inflationary momentum remains high for all components except energy” and that recent bank failures have hit US financial markets harder than those in the Eurozone, while fiscal policy it has become more expansive in the euro zone than in the US to favor further rate hikes by the ECB.

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