European Central Bank President Christine Lagarde said future interest rate decisions are open after upheaval in the global banking system left the economic outlook “blurrier” than just a few weeks ago.
Whether to keep hiking rates would depend on incoming data, above all whether the bank could see signs that painfully high inflation is headed convincingly down, she said during a conference Wednesday at Frankfurt’s Goethe University.
“With high uncertainty, it is even more important that the rate path is data dependent,” she said. That means “we are neither committed to raise further nor are we finished with hiking rates.”
She said “the recent financial market tensions ” have “added new downside risks and have made the risk assessment blurrier."
The open-ended approach is a shift from the ECB's earlier stance of clearly indicating that more rate hikes were in the offing as it underlined its determination to reduce inflation.
But the failure of Silicon Valley Bank in the U.S. has sent shudders through financial markets due to fears that other banks may suffer losses as central banks in the U.S., Britain and Europe rapidly increase interest rates to battle inflation.
Investor worries about banks were intensified by troubles at Swiss bank Credit Suisse, which was rescued through a takeover by rival UBS. Troubles at Credit Suisse long predated the increases in interest rates, however.
The ECB raised rates by a larger-than-usual half-percentage point Thursday after all but promising the move in January. It’s targeting consumer prices that rose 8.5% last month from a year earlier in the 20 countries that use the euro currency.
Higher rates cool off inflation by making borrowing more expensive for new purchases or expanding a business, reducing demand for goods. But with the banking turmoil, commercial banks may become more hesitant to risk lending, which could restrict credit more than central banks might have intended.
The U.S. Federal Reserve is facing a similar conundrum Wednesday. Before the bank woes, the Fed was expected to raise rates by a quarter- or even half-point.
In Europe, Lagarde made clear that she sees “no tradeoff” between fighting inflation and supporting stability in the banking system. She says the ECB has separate tools for each issue: interest rates to combat price spikes and lending support to banks in case of risks.
Europe’s economic prospects brightened slightly after making it through the winter without running out of natural gas after Russia cut off most supply to the continent amid the war in Ukraine.
The German Council of Economic Experts on Wednesday raised its outlook for the eurozone’s largest economy to 0.2% growth from 0.2% contraction in its previous outlook in November.
