London Daily

Focus on the big picture.
Thursday, Oct 22, 2026

The ECB was in a real bind over interest rates – but the Fed and Bank of England's task is slightly easier

The ECB was in a real bind over interest rates – but the Fed and Bank of England's task is slightly easier

Europe's monetary policy regulator could have sparked a big sell-off in European shares had it shied away from a 0.5 percentage points rise which the market had expected earlier this week.
The European Central Bank was in an incredibly difficult position ahead of today's interest rate decision.

Inflation in the eurozone is still running at 8.5% - more than four times the ECB's target rate - while the 'core' rate of inflation, which strips out volatile elements such as energy, food, alcohol and tobacco, actually rose from 5.3% in January to 5.6% in February.

Under those circumstances, markets had fully priced in a rise in the ECB's main policy rate from 2.5% to 3%.

Then came the collapse of Silicon Valley Bank, America's 16th largest lender, sparking turmoil in banking shares and equity markets initially in the US and then, during the last 48 hours, in Europe.

The headline act here was Credit Suisse, the accident prone Swiss lender, whose share price fell in Zurich by 24% on Wednesday.

The ECB, as a key player in the maintenance of financial stability in the eurozone, might then have been forgiven for pausing to take stock of the situation.

It has emerged that it has been informally asking some of the eurozone's major lenders during the last 48 hours about their exposure to Credit Suisse.

Rare and dramatic market moves

Accordingly, some market participants began reassessing the prospects of a half-point interest rate rise this week.

The market began to price in a quarter-point, not half-point, rate hike.

Nowhere was this more apparent than in the market for eurozone government bonds.

The yield - an implied borrowing cost - on two-year German government bonds plunged from 3.277% last Friday morning to as low as 2.373% this morning.

Similarly, the yield on two-year French government bonds slid from 3.1788% last Friday night to as low as 2.5080% on Wednesday afternoon.

These are dramatic moves the like of which are rarely seen in government bonds.

Little choice for an ECB in a bind

But the ECB was in a real bind.

Had it shied away today from a half-point rise, which the market had been expecting earlier this week, it might have prompted some market participants to wonder what the ECB knew about the stability of the eurozone banking sector.

It would probably have sparked a big sell-off in European equities.

So ECB President Christine Lagarde and her colleagues on the bank's rate-setting governing council probably had little choice but to press ahead with the rate rise everyone had been expecting from it until earlier this week.

Instead, they chose to nod to the upheaval in banking stocks in the accompanying statement, adding: "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.

"The euro area banking sector is resilient, with strong capital and liquidity positions."

A dilemma to be faced by the US and UK

The dilemma faced by the ECB will be faced next week by both the US Federal Reserve and the Bank of England as they make their own policy decisions.

In some ways, their task is slightly easier than the one the ECB faced today, because both have been raising interest rates more rapidly than Mme Lagarde and her colleagues.

Yet in both countries, inflation - while slowing - remains well ahead of the Fed's and the Bank's target rates.

Under those circumstances one would expect the Fed to raise its main policy rate, Fed Funds, from the current 4.5-4.75% to 4.75-5% and the Bank to raise its main policy rate, Bank Rate, from 4% to 4.25%.

Both central banks, like the ECB, also have to weigh the battle against inflation against the risk of sparking a recession.

Jay Powell, the Fed chair, has been quite clear in the past that the Fed will not back off from sparking a recession if that is the price that needs to be paid for bringing inflation under control.

The Bank, on the other hand, may be persuaded to keep rates on hold and leave it for a few more weeks.
Newsletter

Related Articles

0:00
0:00
Close
Parliamentary Inquiry Highlights Urgent Need to Address Housing Shortage as Scottish Completions Hit Eleven-Year Low
United Kingdom and Singapore Sign Comprehensive Financial Agreement to Deepen Digital and Sustainable Market Ties
Greggs Announces Plan to Close Four Manufacturing Facilities and Cut Seven Hundred and Forty Jobs
International Monetary Fund Raises United Kingdom Economic Growth Forecast While Warning of Inflationary Pressures
Energy Security and Net Zero Committee Urges Government to Shift Policy Costs Onto Gas to Lower Household Bills
Housebuilding Across Scotland Plummets to Eleven-Year Low Despite Government Pledges to Tackle National Housing Emergency
Greggs Announces Factory Closures Across Northern England and Scotland Affecting Seven Hundred Forty Jobs
United Kingdom and Singapore Conclude Eleventh Financial Dialogue in Singapore to Deepen Cooperation on Digital Finance and Capital Markets
Energy Security and Net Zero Committee Urges Government to Shift Policy Costs to Gas Bills and Tap Windfall Profits to Lower Consumer Prices
British Broadcasting Corporation Announces Major Cost-Cutting Overhaul to Close Linear Broadcast Services for Television Channels BBC Three and BBC Scotland Alongside Digital Radio Station BBC Radio Four Extra
London Capital Markets Face Renewed Scrutiny After High-Profile Offerings Underperform Post-Listing
Green Party Wins Historic First Westminster Parliamentary By-Election in Gorton and Denton
Environment Secretary Emma Reynolds Unveils Sweeping Regulatory Overhaul for English Water Industry
United Kingdom Health Security Agency Confirms Thirty-Four Cases in Kent Meningitis Outbreak
Ministry of Defence Prepares Heat Pump Subsidy Cuts to Fund Urgent Military Modernization
British and European Union Officials Schedule Long-Awaited Bilateral Leaders Summit for November Twentieth
Bank of England Governor Andrew Bailey Urges Strict Fiscal Credibility to Protect British Bond Markets
United Kingdom Inflation Rises to Three Point One Percent Driven by Escalating Fuel Costs
Profit Warnings Among London-Listed Companies Reach Two-Year High Amid Global Energy Shocks
Chancellor John Healey Signals Targeted Tax Changes on Banks and London Corporate Offices Ahead of Budget
British Government Reallocates Twenty-Five Per Cent of International Climate Finance to Global Biodiversity Projects
Initial British Carbon Border Taxes Set to Undercut Parallel European Union Tariffs on Industrial Imports
Whitehall Prepares National Zero-Interest Loan Initiative to Accelerate Domestic Heat Pump and Solar Adoption
European Union Offers British Automakers Access to Hybrid Vehicle Trade Protections Subject to Strict Regulatory Alignment
British Probation Officers Threaten Widespread Industrial Action After Rejecting Five Per Cent Government Pay Offer
Microsoft Abandons Major British Artificial Intelligence Data Centre Citing Severe National Grid Power Constraints
United Kingdom Inflation Accelerates to Three Point Four Per Cent Ahead of Chancellor John Healey's Inaugural Autumn Budget
Surging Cloned Number Plates Severely Complicate Traffic Enforcement and Police Investigations
Mounting Opposition Challenges Planned Rollout of Autonomous Taxis Across London
Influential Think Tank Urges Rejoining European Union to Navigate Geopolitical Crises
Government Review Recommends Slashing Benefits to Fund Youth Employment Initiatives
Senior Minister Shabana Mahmood Seeks New Law Enforcement Pact With European Union
Airbus Executive Warns Britain Risks Losing Crucial Role in European Space Industry
Exorbitant Electricity Costs Push British Steelmakers to Worst Competitive Position in Three Years
British Food and Beverage Exports to European Union Collapse by Over a Third Since Brexit
Up to Twenty English Maternity Units Face Impending Closure Due to Safety and Staffing Crises
Government Declares Severe Drought Across Southern England Following Record Dry Spell
Corporate Profit Warnings Reach Two-Year High Amid Middle East Conflict and Rising Costs
International Monetary Fund Warns Chancellor John Healey Against Proposed Bank Tax Raid
Northern Ireland Secures Favorable Agricultural Export Agreement with European Union
Scottish Government Approves Major Offshore Floating Wind Farm Near Aberdeenshire
High Speed Two Rail Project Faces Three Billion Pound Cost Escalation on Initial Phase
National Health Service Warns of Winter Capacity Crisis Across English Hospitals
Tata Steel Confirms Two Thousand Job Cuts at Port Talbot to Fund Green Transition
Global Microchip Developer Announces Three Billion Pound Semiconductor Plant in Cambridge
United Kingdom Artificial Intelligence Safety Institute Proposes Mandatory Licensing for Generative Models
United Kingdom Commits Additional Long-Range Weapons and Air Defenses to Ukraine
British Chancellor Overhauls Infrastructure Financing to Bypass Borrowing Constraints
Bank of England Holds Benchmark Interest Rate at Four Point Five Percent
First Minister Rhun ap Iorwerth Confirms Constitutional Discussions Over Welsh Independence During Initial Bilateral Call with Prime Minister
×