Silicon Valley bank failure adds to uncertainty

Christine Lagarde, President of the European Central Bank (ECB).

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FRANKFURT – The European Central Bank is still expected to raise interest rates by 50 basis points on Thursday, even as financial stability concerns are back on the table following the collapse of Silicon Valley Bank.

Due to the impact of the SVB crisis, European markets closed sharply lower on Monday. On Friday, SVB was taken over by regulators after massive withdrawals the previous day had effectively caused a bank run. HSBC It then agreed on Monday to buy the UK arm of the struggling lender to US tech start-ups for £1.

Fears of contagion and increased regulation, as well as some widespread profit-taking, led to the worst day for European banks in more than a year on Monday. Regional banks fell 5.65%, their worst day since March 4, 2022.

But the turmoil is not expected to derail this week’s rate hikes by President Christine Lagarde and her governing council, according to analysts, Sylvain Broyer, chief economist for Europe, the Middle East and Africa at S&P Global Ratings, said Tuesday. A report said the ECB still “must deal with inflation issues which are becoming increasingly localized.”

Inflation in the euro zone remains well above the ECB’s 2% target. Headline Inflation in February It was 8.5%, higher than medium-term expectations, and only slightly lower than January’s 8.6%.

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Core inflation — the focus of policymakers for now — accelerated to 5.6% from 5.3%. That reinforces expectations that the ECB will have to push up borrowing costs.

“We recently raised our terminal rate forecast to 3.75% (50 basis points in March and May and 25 basis points in June) and raised the main landing zone for terminals to 3.50-4.00%,” said Deutsche Bank’s Mark Wall Al said in a note to clients. The ECB’s key interest rate is currently at 2.5%.

“Apart from the near-term evolution of core and underlying inflation, which has not yet peaked, the key determinants of final interest rates – where they will be reached, when they will be reached and for how long – will be wage growth, the fiscal stance and financial conditions,” He said.

Elsewhere, ECB watchers are also concerned about a lack of unity in the Frankfurt institutions over where the benchmark interest rate will go.

Paul Hollingsworth, chief European economist at BNP Paribas, said in a research note: “We believe the ECB will be unable to commit to a clear commitment to another rate cut in May, given the clear divisions within the Governing Council over what to do next. Consensus reached 50 basis points.” “Recent comments from council members suggest significant disagreement over the extent and pace of future tightening.”

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The division is again along the classic core-periphery lines within the 20 countries that share the euro. Austria’s central bank president, Robert Holzmann, recently came out to say that the policy rate will not be capped until it exceeds the 4% mark.

His more dovish Italian counterpart, Ignazio Vesco, wasn’t too impressed, saying he didn’t “appreciate my colleagues’ statements about future and long-term rate hikes.”

On Thursday, the ECB will also publish its staff’s latest forecasts for growth and inflation.

“In its new staff forecasts, we expect the ECB will likely slightly raise its growth forecast for this year (weaker energy prices) and lower its growth forecast for 2024-25 (due to policy tightening), while raising its core inflation forecast for this year and lowered headline inflation expectations for this year and next (against the backdrop of softer energy prices),” Societe Generale’s ECB watcher Anatoli Annenkov said in a note.

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