The European Central Bank raised interest rates by 50 basis points on Thursday as promised, ignoring financial market turmoil and calls by investors to dial back policy tightening at least until sentiment stabilizes.
The ECB has raised rates at the fastest rate on record to curb inflation, but a rout in global markets since the collapse of Silicon Valley Bank in the US last week has threatened to scrap those plans at the last minute.
In line with its oft-repeated guidance, the central bank for the 20 countries that share the euro currency chose to raise its deposit rate to 3%, the highest level since late 2008, as inflation is seen above its 2% target until 2025.
However, the ECB did not offer a commitment to extend it for the future despite pressure from policy makers.
"The high level of uncertainty reinforces the importance of a data-driven approach to the Governing Council's policy rate decision," the ECB said.
On Thursday morning, after several days of turmoil in the markets, financial investors saw a 50% chance of a smaller 25 basis point move by the ECB. They have also anticipated expectations for future moves, predicting a peak rate at 3.25%, down from last week's 4.1% price.
European zone bank shares have been in decline this week which was initially driven by the fall of SVB then the fall of Credit Suisse.
The ECB's main concern is that monetary policy works through the banking system, and that a severe financial crisis would render its policy ineffective.
This leaves the ECB in the same dilemma in its struggle to fight inflation with the need to maintain financial stability in the face of an enormously imported turmoil.
Inflation is seen to average 5.3% this year, 2.9% in 2024 and 2.1% in 2025, the ECB reported, adding that these projections were finalized before the current turmoil.
"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 ECB said.
Investors' attention now turns to ECB President Christine Lagarde's press conference where she will be questioned about future policy measures and the risk of contagion in the banking sector.
