He European Central Bank (ECB) reaffirmed this Thursday in his decision to raise interest rates, despite banking turmoil of the last days. After the intervention of the American Silicon Valley Bank (SVB), and even more so after the Credit Suisse collapsed on the stock market on Wednesday and fears of contagion in Europe increased, there were doubts about whether the institution that presides Christine Lagarde he was going to moderate his monetary policy so as not to harm banking stability. It has not been like that, or at least not at the moment. As expected, the ECB raised interest rates by 0.5 percentage points to 3.5%, maintaining the upward trend that began in July of last year, but unlike the previous meeting, it left future increases in the air.
The expectation about what the ECB was going to decide had been generated around a dichotomy: fight against inflation or protect the stability of the financial system. As interest rates rise, the economy cools and prices moderate. But at the same time, the rise in interest rates is one of the reasons behind the fall of the SVB and could affect other banks in a similar situation. So when the ECB continues to bet on making money more expensive, what it is doing is make the fight against inflation a priority in their decisions. It cannot be otherwise, because the Treaty on the Functioning of the European Union assigns the ECB a clear mandate to maintain price stability. That and no other should be your main mission. With a inflation in the euro zone of 8.5% and a forecast for this 2023 of 5.3%, both well above the 2% objective, in the government council this Thursday the criteria of the most orthodox governors was imposed.
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Although it may seem paradoxical, that the ECB did not act this Thursday to reassure the banking industry can be interpreted as a vote of confidence towards this: does not need exceptional measures because it is solid enough. Otherwise, speculation would have skyrocketed about a contagion that, according to current indicators, should not have occurred. Official speeches maintain that European entities are subject to controls and stress tests that guarantee their solvency and resilience, and questioning them would be counterproductive.
A different thing is what happens from now on. Lagarde promised to “provide liquidity support to the eurozone financial system if necessary” and left the door open for a change in monetary policy, if financial tensions persist. To date, the ECB has argued that the economy and employment have withstood the rate hike well. But this rise is not innocuous, because affects the indebtedness of citizens, companies and states. It is necessary to gauge whether these damages are greater than those produced by inflation, which continues at very high levels and is impoverishing the population. Another question is whether to look for 2% at all costs. A slowdown in the rise in interest rates could be considered, such as the one that the US Federal Reserve (Fed) has already started, which began to raise them before the ECB. The ECB will have to strike balances if it wants to protect the financial system and avoid a recession, while keeping in mind its main mandate to monitor price stability.