Governing Council meeting, ECB 16/3/2023

Governing Council meeting, ECB. 16th March 2023

ECB raises rates by a further 0.5% in spite of banking sector worries     

The ECB’s Governing Council raised all three of its key interest rates by a further 0.5% at its meeting on 16^th March. Since July 2022, the cost of borrowing on its main refinancing fixed rate has risen by 350bps to 3.5%  in total - an unprecedented cycle of tightening. Although inflation dipped slightly, from 8.6% in the year to January to 8.5% a month later, the Governing Council stressed that it was “projected to remain too high for too long” even as it reduced its expected December inflation forecast to 5.3% from the prior 6.3%. Particular concerns were expressed over the core inflation rate (i.e., excluding food and energy costs) which is continuing to rise. The Governing Council removed their commitment to keep ‘raising interest rates significantly at a steady pace’ from the last policy statement, suggesting a more dovish tone. There were no new announcements about the run-off of assets. Maturing assets purchased under the 2019 Asset Purchase Scheme will be run off at a rate of €15b. per month from March until June 2023 at which point the rate of run-off will be reviewed. No assets purchased under the much larger 2020 Pandemic Emergency Purchase Programme will be run off before the end of 2024.

The collapse of the Silicon Valley Bank and Signature Bank in the United States, along with the liquidity problems of Credit Suisse, had led to renewed concerns over the stability of the global financial system. Although at the time of writing, details are being announced for plans by Credit Suisse to borrow up to SFr 50.b. from the Swiss Central Bank as a liquidity backstop – once again highlighting its importance to the Swiss economy. The press release following the Governing Council’s meeting concerns while insisting that “the Euro area banking sector is resilient, with strong capital and liquidity positions”, adding that the ECB has the ability to ‘provide liquidity support’ if needed, No mention was made of plans for additional banking . However, the ECB has asked EU lenders to disclose their exposure to Credit Suisse. The demand for banks to hold more capital was the main factor in turning the collapse of Lehman Brothers in the U. S. and Northern Rock in the UK into a global financial crisis. Given the ECB’s determination to bring inflation down to its maximum 2% goal for the Eurozone, the effects of any additional bank regulation on top of the current monetary tightening would be worrying. Broad money growth fell by €20b. in January after declining by €38b. in December. New bank credit has become the principal driver of broad money growth since the end of asset purchases last year. If banks will be required to set aside even more capital, leaving them with less resources available for new loans, broad money growth is likely to fall still further.

Continued high inflation continues to cause sharp falls in consumer spending and investment, which has seen Eurozone GDP flatlin in the final quarter of the year. This has resulted in Germany, once the powerhouse of the Eurozone economy, record a 0.4% contraction in GDP From the previous quarter. Even if the ECB avoids any additional banking regulation, the ongoing tightening of monetary policy does not offer much hope of a recovery in broad money growth. The macroeconomic outlook for the Eurozone, recently enlarged by the accession of Croatia, does not look at all promising, with any thoughts of a swift rebound looking less likely.