The European Central Bank (ECB) has announced a significant 0.5 percentage point increase in its base interest rate. This decision was not welcomed by anyone considering the ongoing banking crisis. This move has come as a surprise to many, as there was speculation that economists in Brussels would opt for a more modest rate hike. Experts believed that the recent collapses of three major U.S. financial institutions would lead to another decision. Besides, ECB had other plans, disregarding the current situation with Credit Suisse as well.
Yet, ECB President Christine Lagarde indicated that the priority at the moment is to bring inflation under control. Projections show that inflation is likely to remain too high for longer. Lagarde also stated that inflation remains a concern despite the resilience of the European banking system.
The decision to hike rates comes at a time when Credit Suisse has uncovered “material weakness” in its financial reporting. This has resulted in the bank having to borrow $54 billion. The news caused panic in investors, leading to Credit Suisse stocks falling by 98% in value. If that wasn’t enough, the bank is currently facing a 47% probability of default, the highest in its history. For your information, Credit Suisse is one of the largest banks in Europe.
The ECB’s decision to increase rates was not welcomed by those in the banking industry. Higher interest rates are likely to make borrowing more expensive. As such, this decision might reduce economic growth. Yet, the ECB’s move is in line with its mandate to keep inflation below 2%, no matter the consequences. The increase is seen as a necessary measure to decrease the rising inflation to some extent.
After ECB, U.S. Federal Reserve to Increase Interest Rate Hike Next Week
All eyes will now be on the U.S. Federal Reserve, which is expected to introduce its own rate hike next Wednesday. There is growing speculation that the U.S. central bank is looking at a more modest 0.25 percentage point rise. Following the recent collapses of Silvergate, Silicon Valley Bank, and Signature, US banks are currently facing a crisis. The latest Consumer Price Index reading in the U.S. came in at 6%. This CPI is three times higher than the target of 2%. Yet, inflation is starting to come down after surging beyond 9% last year.
Did Credit Suisse Influence Bitcoin and the Cryptocurrency Market?
The news of the ECB’s interest rate hike has also had an impact on the cryptocurrency market. Bitcoin had spiked to a nine-month high of $26,000 earlier in the week. Such a rise came unexpectedly after major US banks such as Silvergate and Silicon Valley Bank were in turmoil. Today, Bitcoin is trading at a price of ~$24,000.
While the decision of the ECB to increase interest rates in the current banking crisis may be bold, it could also be a better decision than doing nothing. If nothing, ECB is staying true to its promise to keep inflation under control. Christine Lagarde believes that this move is necessary to ensure the long-term stability of the European economy. How the market reacts, however, is not certain. The following weeks will be crucial for the global banking system.