San Francisco Frontiers - ECB sticks to planned rate hike despite turmoil

The bank raised interest rates by half a percentage point, its sixth successive hike -- but it notably omitted language from its statement about the need to raise rates "significantly" going forward.

Policymakers had faced calls to slow their aggressive hiking campaign after the collapse of Silicon Valley Bank and Signature Bank in the United States, the sector's biggest failures since the 2008 financial crisis.

Fears of contagion have spread to Europe, with a market rout forcing Credit Suisse to tap a financial lifeline from the Swiss central bank.

After its share price crumbled on Wednesday, Switzerland's second biggest bank, already battling multiple scandals, sought to stave off the latest crisis by announcing it would borrow up to $54 billion from the country's central bank.

Its shares soared more than 30 percent at the open Thursday, and European stocks rebounded slighlty.

But US and European markets wobbled after the Frankfurt-based ECB, the first major central bank to meet since the banking turmoil began, stuck to its guns on interest rates.

"Inflation is projected to remain too high for too long," the bank said in a statement. Its latest decision leaves the three main rates in the 20-nation currency club 3.5 percentage points higher than July.

It also insisted that the eurozone banking sector is "resilient, with strong capital and liquidity positions".

"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 ECB said.

It recalled that it was equipped to provide liquidity support to the eurozone's financial system "if needed".

- GDP forecast lifted -

The ECB also increased its projection for eurozone GDP growth this year to 1.0 percent due in part to falling energy prices. It had previously forecast 0.5 percent growth for this year.

It lowered its inflation forecast for this year -- to 5.3 percent, from 6.3 percent previously -- but increased it for next year.

The US Federal Reserve and the Bank of England, who have both been hiking rates to combat soaring prices, hold meetings next week.

There is much debate also over whether the US central bank will continue with its rate tightening campaign as the collapse of SVB has been widely linked to the sharp rise in borrowing costs over the past year.

While Credit Suisse has been hit by the market volatility, it had already been battling multiple scandals in recent times.

Its problems ranged from the bankruptcy of British financial firm Greensill, in which some $10 billion had been committed, to the implosion of US fund Archegos, which cost it more than $5 billion.

Its annual report this week acknowledged "material weaknesses" in internal controls.

Ahead of the market upheaval, ECB president Christine Lagarde had said the bank's council will "very, very likely" raise interest rates by another 50 basis points.

All eyes are now on what Lagarde will say at the post-meeting press conference.

Neil Shearing of Capital Economics said Lagarde would need to "reassure investors that no major eurozone European banks are in the same position as Credit Suisse and -- more importantly -- stress that eurozone institutions have the unequivocal backing of the ECB".

The ECB has hiked rates at a historically fast pace to cool consumer prices after energy and food costs shot up in the wake of Russia's war in Ukraine.

Declining energy prices in recent months have helped slow inflation to 8.5 percent in February.

B.Johnson--SFF