The European Central Bank’s governing council decided on Thursday to raise its key interest rate by 0.5 percentage points, bringing the main rate to 3.5 percent—the highest level since November 2008. The deposit facility rate, the rate used by banks to park excess reserves, increased to 3 percent. This move extends the tightening cycle that had already begun six weeks earlier. Investors watched for signs that banks could withstand the strain after recent stress events involving Silicon Valley Bank and Credit Suisse. While market jitters persisted, the easing of some pressure on Credit Suisse helped support euro-area prices in the wake of the ECB’s actions.
The euro area central bank defended the decision, arguing that inflation is expected to remain too high for too long. It also sought to reassure markets about banks, stating that the Governing Council is closely monitoring current tensions and stands ready to respond to preserve price stability and financial stability in the euro area. The ECB emphasized that the euro area banking sector remains resilient and well capitalized, with ample liquidity. It underscored that it possesses the tools needed to provide liquidity and maintain the smooth transmission of monetary policy if necessary.
The decision came under intense scrutiny after a turbulent period that included the collapse of Silicon Valley Bank and the shock waves felt by Credit Suisse. These events sparked concerns about a broader financial crisis and raised questions about the resilience of monetary policy transmission in Europe. Some analysts expected a 0.5 percentage point increase, while a few considered keeping rates unchanged to relieve stress on the financial system. The actual outcome reflected a balancing act between protecting financial stability and continuing to combat inflation.
In the lead-up to the decision, consensus among market participants had leaned toward a 50 basis-point increase, but the economic context and the health of the banking sector influenced the final stance. The episode underscored the delicate trade-off policymakers face when inflation remains stubbornly high while banks face evolving risk profiles. Allianz Global Investors’ Franck Dixmier noted that the ECB must watch inflation closely while avoiding a perception of complacency about financial risks.
The central bank signaled that any future policy moves would depend on evolving data. Inflation in the Eurozone remains a central constraint, with broad measures cooling but underlying inflation still stubbornly elevated. February data showed overall inflation easing, yet core inflation held near historically high levels. As a result, the ECB stressed that it intends to keep monetary conditions tight until inflation is decisively on a path toward the 2 percent target, even if that means continuing to raise rates gradually. The primary objective remains price stability in the medium term, while ensuring that financial stability remains intact and that credit continues to flow to the real economy.
Nordic and southern European economies have shown varying trajectories, but overall activity has been steadier than some early fears suggested. Employment has performed comparatively better than expected, which complicates the ECB’s path toward cooling demand without triggering a sharper downturn. The central bank projected that GDP would grow modestly this year, while inflation is predicted to slow toward target levels over time. Market participants will watch the upcoming data carefully for clues about how quickly the easing of inflation will translate into lower interest rates in the future.
As the ECB navigates this phase, the balance between fighting inflation and sustaining financial confidence remains at the forefront. The bank faces a complex landscape: inflation pressures persist from multiple sides, core price pressures persist, and banks must maintain access to funding. The central bank’s ultimate goal is to keep inflation near 2 percent in the medium term while preserving the stability and smooth functioning of the financial system. The coming months will reveal how the policy stance evolves in response to evolving economic and financial conditions.