Big ECB Hike Called Into Doubt by Credit Suisse: Decision Guide

(Bloomberg) — The European Central Bank’s plan to raise interest rates by another half-point on Thursday has been thrown into question by banking turmoil that began in the US but has since landed with a jolt much closer to home.

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The crisis at Credit Suisse Group AG that followed the collapse of Silicon Valley Bank has left analysts less certain that the intended hike will in fact materialize. Investors are pricing 40 basis points, while Bloomberg Economics and Deutsche Bank predict just 25.

While worries over inflation haven’t gone away, the challenge is to battle elevated price gains with financial stability already in the balance. It’s the same for the US. But with the Federal Reserve’s next rate meeting still a week away, the ECB will give the first indication of what the banking blowup means for monetary policy.

In the quiet period that silences ECB policymakers before rate meetings, ex-officials Vitor Constancio and Lorenzo Bini Smaghi have weighed in to advise a quarter-point increase at most. Former Federal Reserve Vice Chair Alan Blinder is similarly minded, telling Bloomberg TV that he’d leave borrowing costs untouched this month due to the potential consequences for Europe were Credit Suisse to fail.

The Swiss National Bank has come to the rescue, offering liquidity through a covered-loan facility. Credit Suisse said in the early hours of Thursday that it would borrow as much as 50 billion francs ($54 billion).

The ECB’s announcement — due at 2:15 p.m. in Frankfurt — may now hinge on how the markets take the news. Policymakers will also consider fresh quarterly economic forecasts for the euro zone that are set to show headline inflation receding faster than previously seen — even as underlying price gains prove stickier.

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President Christine Lagarde will brief reporters at 2:45 p.m. The latest banking woes mean the usual guidance on what to expect at later meetings may be less forthcoming, particularly with dovish policymakers already primed to offer up sterner resistance to such signaling.

Interest Rates

Following its February meeting, the ECB all but promised a 50 basis-point advance in the deposit rate to 3% this month, saying it will then “evaluate the subsequent path” of monetary policy.

The heightened banking risks, though, may provide grounds to lift borrowing costs by less — or not at all — while convincing hawks to be less vocal about how many more hikes are required in the coming months.

The relative harmony that’s prevailed on the Governing Council during the most aggressive tightening campaign in ECB history was already unraveling. Comments last week by Austria’s Robert Holzmann advocating more big steps to take rates to 4.5% by July were slammed by Italy’s Ignazio Visco.

“Uncertainty is so high that the Governing Council has agreed to decide ‘meeting by meeting,’ without ‘forward guidance,’” Visco said even before the troubles at SVB emerged. “I therefore don’t appreciate statements by my colleagues about future and prolonged interest-rate hikes.”

Also interesting will be Lagarde’s view on money markets paring their bets for borrowing costs. Investors currently see the deposit rate peaking at about 3.35% in the second half of the year — down from more than 4% — while inflation expectations haven’t budged.

Forecasts

Updated projections for the 20-nation euro zone will show slower price growth for 2023 and 2024, alongside stronger core inflation that excludes food and energy costs, according to economists surveyed this month by Bloomberg.

The former will offer ammunition to doves seeking smaller rate hikes, while the latter will allow their hawkish colleagues to continue pushing for a tougher approach.

The recent repricing of market rate wagers, however, could render the latest outlook obsolete before it’s even published, since such expectations represent an important input into the projections.

Financial Stability

Euro-area finance ministers, who met on Monday, highlighted the region’s “very strong regulatory and resolution framework” in arguing that any SVB fallout will be limited.

Among ECB officials, only Greece’s Yannis Stournaras has offered any words of confidence, saying he and his colleagues “don’t see any impact” on euro-zone banks.

Lagarde is sure to face questions on whether the experience of Credit Suisse in neighboring Switzerland — whose stock lost as much as 31% on Wednesday alone — could be a harbinger of a full-blown financial crisis.

She may also be asked how the ECB can balance efforts to deliver price stability while safeguarding financial stability, as rising rates expose vulnerabilities that have accumulated during years of record-low borrowing costs.

–With assistance from James Hirai.

(Updates market rate bets starting in second paragraph.)

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