As they hinted at in their latest public remarks, European Central Bank officials raised interest rates by half a percentage point on Thursday, despite turmoil in the European banking market following problems at Credit Suisse.

President of the European Central Bank (ECB) Christine LagardePhoto: Daniel Roland / AFP / Profimedia Images

Some analysts did not rule out a more modest increase in interest rates precisely because of the recent panic in the European banking market, but the representatives of the ECB renewed their commitment to continue the process of “significant increases in interest rates at a constant pace.”

The US Federal Reserve and the Bank of England are due to meet next week, and analysts are divided on the decisions to be made.

Shares in Credit Suisse and other European banks recovered some earlier losses on Thursday after Switzerland’s second-biggest lender said it would borrow up to 50 billion Swiss francs ($54 billion) from the Swiss central bank.

Inflation is expected to remain too high for a long time, the ECB said in a statement on Thursday. “The Governing Council today decided to raise three ECB interest rates by 50 basis points in line with its commitment to ensure that inflation returns to the 2% target over the medium term.

The Governing Council is closely monitoring current market tensions and stands ready to react if necessary to maintain price stability and financial stability in the euro area. The euro area banking sector is resilient and the ECB’s policy toolkit is fully equipped to provide support to the euro area financial system if needed, the release said.

The new macroeconomic forecasts were completed in early March, before the recent outbreak of tensions in financial markets.

“These tensions create additional uncertainty about the underlying estimates of inflation and growth,” the ECB acknowledges.

ECB key interest rates

The Governing Council decided to increase the ECB’s three key interest rates by 50 basis points. Accordingly, the base interest rate, credit line and deposit rate will be increased to 3.50%, 3.75% and 3.00% respectively from March 22, 2023, the notification also said.