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Monday, Oct 26, 2026

European Central Bank sticks to its guns on interest rates despite market turmoil

European Central Bank sticks to its guns on interest rates despite market turmoil

Banking shares come under further pressure after the ECB says it must prioritise the battle against inflation over financial market jitters for what rate rises are doing to banks.
The European Central Bank (ECB) has maintained its fight against inflation and imposed a large set of interest rate hikes despite financial market turmoil.

Bank balance sheets have suffered because of the effect of interest rate increases, which have contributed to recent crises at Silicon Valley Bank and Credit Suisse.

But the central bank - responsible for monetary policy in the 20 nations which use the euro as their currency - stuck to its original plan to tackle inflation through rate rises.

Last week. it had been widely expected to impose the 0.5 percentage point hikes across its three main interest rates to maintain its battle against inflation.

Market speculation grew on Wednesday, though, that it would shy away from such rises given the market mayhem that had taken hold in the wake of Silicon Valley Bank's collapse - hitting the stocks of all major European banks hard.

It culminated in a rout for shares in major Swiss lender Credit Suisse, which later took a financial lifeline to shore up confidence.

The ECB said it took its decision because "inflation is projected to remain too high for too long", describing its banking system as "resilient" despite reportedly warning EU politicians that some euro area banks could be vulnerable.

'Elevated level of uncertainty'

Banking shares on the continent took another hit in response to the rate rises though the jitters later subsided as the market focused on the central bank's assurances that it was aware of the sensitivities surrounding its rate hikes.

"The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council's policy rate decisions, which will be determined by its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission", the statement from the ECB said.

"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."

It highlighted the current "severe" market tensions as a potential risk to the eurozone economy as the pressure on banks could dampen the provision of credit.

At a news conference, ECB president Christine Lagarde added: "The [economic] projections that we have do not incorporate any of the most recent developments and certainly not the impact of the most recent financial tensions that we have observed on the markets.

"So there is a level of uncertainty that has been completely elevated because of that [and] that is the reason why
we reinforce the principle of data-dependency [in our future policy decisions]."

'We see this as a wise move'

Shares in Credit Suisse ended the day 20% higher on the back of its bailout while investors put the ECB's rate hikes behind them to allow a meagre recovery in wider bank shares.

The meltdown for banking and many other financial services stocks reflects deep concerns for the health of their balance sheets due to rising interest rates.

The aggressive pace of rate hikes across Western economies has raised the cost of servicing their debts and placed a greater strain, to varying degrees, on their balance sheets.

Regulators, including those in the UK, have insisted that there is no systemic risk and that banks are far better capitalised than they were before the financial crisis.

Matthew Ryan, head of market strategy at financial services firm Ebury, said: "The ECB stuck to its guns today in delivering a 50bp rate hike, despite the acute uncertainty in markets triggered by the collapse of Silicon Valley Bank and the slump in European banking shares.

"We see this as a wise move, as not only does sky-high core inflation and a resilient euro area economy warrant additional policy tightening, but the larger hike sends a clear signal of confidence in the strength of the European banking sector.

"In our view, a 25bp rate increase may have also raised question marks about the ECB's credibility, given the thorough hawkishness of the bank's recent forward guidance."
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