European Central Bank policymakers are meeting on Thursday amid exceptional turmoil in financial markets that could force it to ditch plans for another hefty interest rate hike as fears of a fresh financial crisis crowd out inflation worries.
Having raised interest rates since July at its fastest pace on record to curb inflation, the ECB had effectively promised another 50 basis point (bps) increase for Thursday and signalled further moves in the months ahead.
But the collapse last week of Silicon Valley Bank in the United States has raised concerns about stress across the banking sector and sent shares into a dive, with Credit Suisse, long dogged by problems, at the centre of the rout in Europe.
While shares were rallying on Thursday after the Swiss National Bank threw Credit Suisse a $54 billion lifeline, the volatility kept markets under stress, a worry for the ECB since monetary policy works via the financial system.
"The support provided by the Swiss National Bank to Credit Suisse removes systemic risk to the extent that the ECB will still be able to raise rates today by 50 bps," Lorne Baring, the Managing Director of B Capital SA said.
Supporting the case for a bigger rate move, the ECB's new economic projections will show inflation significantly above its 2% target in 2024 and slightly over in 2025, a source with direct knowledge told Reuters earlier.
Projections for underlying inflation, an indicator of the durability of price growth, are meanwhile set to be raised, suggesting that disinflation will be protracted and monetary policy will have to remain tight for some time.
This outlook is so worrying that prior to the turmoil in the banking sector, a long list of policymakers had advocated rate hikes continuing beyond March.
