European Central Bank Hikes Rates By 50 Basis Points, Lagarde Says 'A Lot Has Changed Since March'

The European Central Bank hiked interest rates by 50 basis points Thursday, bringing the rates on its main refinancing operations and deposit facility to 3.5% and 3%, respectively, as it anticipates inflation will remain "too high for too long." 

Lagarde Signals Data-Dependent Approach: ECB President Christine Lagarde emphasized during the news conference Thursday that more ground will need to be covered in hiking interest rates if baseline economic conditions persist.

In the financial sector, “a lot has changed since March,” and the mounting uncertainty is not taken into account in current economic forecasts, she said.

Given the significant economic uncertainty, Lagarde reaffirmed the ECB’s data dependency principle, which states the ECB will consider upcoming data without pre-committing to future interest rate decisions.

The decision to raise rates by 50 basis points was made by a vast majority of the board, the central banker said.

When asked about the potential of reversing the course of interest rates, Lagarde said the ECB "would need to get confirmation of the underlying component of inflation heading to the right direction."

Regarding the resilience of the EU banking industry, ECB Vice-President Louis De Guindos emphasized that European banks are resilient, with strong capital ratios, substantial liquidity buffers and little exposure to both American institutions and Credit Suisse Group AG CS.

Lagarde said: “We don’t have incidents like the one that happened in California."

De Guindos said: "The model of Silicon Valley Bank was quite unique, given the mismatch between the value of assets and the value of liabilities."

Traders are now pricing in 25bps of hikes in ECB interest rates until July 2023.

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The ECB Statement: In the Governing Council's statement, the ECB said it carefully observes market tensions and remains ready to act as warranted to safeguard price stability and financial stability in the eurozone.

The banking industry is "resilient" due to its robust capital and liquidity positions, the council's statement said. 

The ECB revised its macroeconomic predictions, but stressed the calculations were made prior to the recent emergence of financial market tensions, implying that inflation and growth estimates are subject to more uncertainty in the coming months.

Inflation is expected to average 5.3% in 2023, 2.9% in 2024, and 2.2% in 2025. The ECB's average baseline projection for growth in 2023 has been increased to 1%.

The Market Reaction: The iShares MSCI Eurozone ETF EZU turned positive in the wake of Lagarde's commentary, trading 0.55% higher midday Thursday. 

ECB President Christine Lagarde. Photo via Shutterstock.