Arab Press

بالشعب و للشعب
Saturday, May 31, 2025

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

Arab Press
0:00
0:00
Close
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
EU Central Bank Pushes to Replace US Dollar with Euro as World’s Main Currency
European and Arab Ministers Convene in Madrid to Address Gaza Conflict
Head of Gaza Aid Group Resigns Amid Humanitarian Concerns
U.S. Health Secretary Ends Select COVID-19 Vaccine Recommendations
Trump Warns Putin Is 'Playing with Fire' Amid Escalating Ukraine Conflict
India and Pakistan Engage Trump-Linked Lobbyists to Influence U.S. Policy
U.S. Halts New Student Visa Interviews Amid Enhanced Security Measures
Trump Administration Cancels $100 Million in Federal Contracts with Harvard
SpaceX Starship Test Flight Ends in Failure, Mars Mission Timeline Uncertain
King Charles Affirms Canadian Sovereignty Amid U.S. Statehood Pressure
Iranian Revolutionary Guard Founder Warns Against Trusting Regime in Nuclear Talks
Netanyahu Accuses Starmer of Siding with Hamas
Calls Grow to Resume Syrian Asylum Claims in UK
UAE Offers Free ChatGPT Plus Subscriptions to Citizens
Denmark Increases Retirement Age to 70, Setting a European Precedent
Iranian Director Jafar Panahi Wins Palme d'Or at Cannes
Israeli Airstrike Kills Nine Children of Gaza Doctor
Lebanon Initiates Plan to Disarm Palestinian Factions
Iran and U.S. Make Limited Progress in Nuclear Talks
Trump Administration's Tariff Policies and Dollar Strategy Spark Global Economic Debate
OpenAI Acquires Jony Ive’s Startup for $6.5 Billion to Build a Revolutionary “Third Core Device”
Turkey Weighs Citizens in Public as Erdoğan Launches National Slimming Campaign
UK Suspends Trade Talks with Israel Amid Gaza Offensive
Iran and U.S. Set for Fifth Round of Nuclear Talks Amid Rising Tensions
Russia Expands Military Presence Near Finland Amid Rising Tensions
Indian Scholar Arrested in Crackdown Over Pakistan Conflict Commentary
Israel Eases Gaza Blockade Amid Internal Dispute Over Military Strategy
President Biden’s announcement of advanced prostate cancer sparked public sympathy—but behind closed doors, Democrats are in panic
Mount Lewotobi Laki-Laki Erupts Again, Spewing Ash Cloud over Flores Island
Indian jet shootdown: the all-robot legion behind China’s PL-15E missiles
The Chinese Dragon: The True Winner in the India-Pakistan Clash
Australia's Venomous Creatures Contribute to Life-Saving Antivenom Programme
The Spanish Were Right: Long Working Hours Harm Brain Function
Did Former FBI Director Call for Violence Against Trump? Instagram Post Sparks Uproar
US and UAE Partner to Develop Massive AI Data Center Complex
Apple's $95 Million Siri Settlement: Eligible Users Have Until July 2 to File Claims
US and UAE Reach Preliminary Agreement on Nvidia AI Chip Imports
President Trump and Elon Musk Welcomed by Emir of Qatar Sheikh Tamim with Cybertruck Convoy
Strong Warning Issued: Do Not Use General Chatbots for Medical, Legal, or Educational Guidance
NVIDIA and Saudi Arabia Launch Strategic Partnership to Establish AI Centers
Trump Meets Syrian President Ahmad al-Shara in Historic Encounter
US and Saudi Arabia Sign Landmark Agreements Across Multiple Sectors
Why Saudi Arabia Rolled Out a Purple Carpet for Donald Trump Instead of Red
Elon Musk Joins Trump Meeting in Saudi Arabia
Trump says it would be 'stupid' not to accept gift of Qatari plane
Quantum Computing Threatens Bitcoin Security
Michael Jordan to Serve as Analyst for NBA Games
Senate Democrats Move to Censure Trump Over Qatar Jet Gift
Hamas Releases Last Living US Hostage from Gaza Amid Ongoing Conflict
×