The European Central Bank (ECB) is watching for signs of stress in the banking sector as financial turmoil continues to escalate, raising concerns of a potential full-blown crisis.
Europe’s top brass takes relaxed view on market jitters
The ongoing struggles faced by the banking sector have led to doubts among investors about the ECB’s ability to continue raising rates to combat inflation. Credit Suisse, a Swiss giant, required a last-minute rescue, and two US lenders went under in recent times.
While ECB’s top brass is optimistic that a crisis that completely rewrites the outlook is unlikely, it is closely monitoring the banking sector for potential risks to monetary policy.
ECB’s chief economist, Philip Lane, is not concerned about market jitters, indicating that they may not have a significant impact on monetary policy, or may only affect it marginally.
Lane has also highlighted that the probability of a crisis that completely rewrites the outlook remains low. Similarly, Pierre Wunsch, Belgium’s central bank chief, agrees that the banks in the bloc remain healthy due to robust supervision.
Christine Lagarde, ECB President, is worried that the bank’s interest rate hikes could become magnified if banks become more risk-averse and start demanding higher rates when lending.
This could imply that the central bank would need to do less. However, Fabio Panetta, an ECB board member, has voiced concerns about weakness in demand, which could potentially hinder further tightening.
The ECB has been paying a record-breaking 3% on bank deposits since July, and financial markets expect another increase to 3.5% later this year. However, the ECB has recently removed its expectation of raising rates again at upcoming meetings, given the recent financial jitters.
Ignazio Visco, governor of the Bank of Italy, has called for a “very prudent” monetary policy, as it is crucial to avoid a credit crunch. Lagarde has reaffirmed the ECB’s commitment to bringing inflation in the eurozone to 2%, highlighting that past hikes are only beginning to be passed onto the economy.
However, while headline inflation is falling rapidly, underlying price growth remains stubbornly high, indicating that inflation may remain stubborn.
Lane expects that core prices will ease over time as lower fuel costs filter through to other sectors. However, he has cautioned that this expectation is based on growth in wages peaking this year.
ECB remains vigilant
The ECB is keeping a close eye on the banking sector and potential risks to monetary policy, as investors remain concerned about the impact of the ongoing financial turmoil.
The central bank for the 20 countries that share the euro has increased the rate it pays on bank deposits to a record-breaking 3% since July, and it is expected that there will be another increase to 3.5% later this year.
Nevertheless, the ECB has recently removed its expectation of raising rates again at upcoming meetings in light of the recent financial jitters.
The ECB remains vigilant and is closely monitoring the banking sector for potential risks to monetary policy amid escalating financial turmoil. Its commitment to bringing inflation in the eurozone to 2% remains firm, despite ongoing concerns about underlying price growth.