ECB’s Christine Lagarde is suddenly coy on future rate hikes as officials grapple with banks rout

European central bankers stuck to their guns in the immediate term by raising interest rates half a percentage point on Thursday despite a week of financial market turmoil. The move was so well flagged that failing to hike might well have spooked investors even further. 

It takes the bank’s main lending rate to 3.5pc and the deposit rate to 3pc. It was the sixth hike in a row and brings rate rises to a cumulative three percentage points since last July. 

Lagarde said the decision was “completely justified by the circumstances” and backed by a “very large majority” of bank governors – although three or four were keen to go slower, she admitted.

That is likely to make for “heated debates” at future meetings, said ING bank’s global head of macro, Carsten Brzeski.

The tricky problem for the ECB is what to do next, knowing that the failure of start-up lender Silicon Valley Bank (SVB) – the ‘patient zero’ in a US bank share sell-off that is now infecting European lenders – was caused by the US Federal Reserve jacking up interest rates by a total of 4.5 percentage points over the last year.

SVB’s collapse last week has increased scrutiny of global investment bank Credit Suisse, at least before it secured a €50bn lifeline from the Swiss National Bank on Thursday.

Three sources told Reuters that the ECB decided to go ahead with its 0.5pc rate hike only after it was sure the Credit Suisse bailout was a done deal.

It is difficult not to draw parallels with 2008, when a worldwide credit crunch and financial crisis was triggered by the implosion of US investment bank Lehman Brothers, a downfall brought about by an over-exposure to junk mortgages.

Like Lehman Brothers, SVB was over-exposed in its own way: to start-up firms, who padded its deposit base, and to US government bonds, which it was forced to sell at a loss to pay those depositors after interest rates went up.

Unlike 2008, the ECB believes that banks are in a “completely different position” now and won’t need expensive taxpayer-funded bailouts. 

Lagarde said the ECB would “stand ready to respond as necessary” to calm markets, including by reviving pandemic-era bond buying, if needed.

Economist Austin Hughes said the ECB “has attempted to signal its desire to calm rather than contribute to current market tensions” – which could be good news for rates.

But the still sky-high pace of inflation remains the ECB’s underlying preoccupation, so while Lagarde would not be drawn on future hikes, she hinted there was still some heat left to be taken out of the economy.

Her tight-lipped attitude is a shift for the central bank.

Just last week, her chief economist, former Irish Central Bank head Philip Lane, told an audience in Trinity College that it would be “appropriate to raise rates further beyond” March.

But that was before SVB. As facts change, opinions may change too.

"With financial market conditions both fragile and fluid, the likelihood is that any further ECB rate hikes in coming months will not happen as fast,” Mr Hughes said, predicting one or two 0.25pc hikes by the summer.

Lagarde insists she will be led by the data, which shows underlying inflation – minus volatile food and energy prices – is at record levels and is “not yet heading” in the right direction. Irish inflation actually picked up in February to 8.5pc, reversing a three-month trend.

On the upside, Lagarde said rate hikes are beginning to filter through to the economy, making lending more difficult and expensive, which is the bank’s main way to control demand, spending and prices.

So what does that mean for Irish businesses and mortgage borrowers?

While tracker customers have borne the brunt of the hikes so far, Trevor Grant, the chair of the Association of Irish Mortgage Advisors, said others – including first-time buyers, variable and fixed rate customers – are “increasingly being drawn into the firing line”.

Economist Austin Hughes said there is an argument to be made for a “temporary pause” in rate hikes to take stock of what the ECB has done so far and digest the fallout from SVB’s collapse.

"It is still likely that rates will need to rise modestly further, and the ECB also has to gradually reduce its balance sheet, but such measures might be undertaken as a matter of tidying-up rather than a material tightening,” he said.