Silicon Valley bank collapse adds uncertainty

FRANKFURT – The European Central Bank is expected to hike rates by another 50 basis points on Thursday even as financial stability concerns are firmly back on the table with the collapse of Silicon Valley Bank in the US.

European markets closed higher on Monday amid the impact of the SVB crisis. On Friday SVB was effectively made a bank run by regulators following massive withdrawals the day before. hsbc Then on Monday agreed to buy the British arm of the troubled US tech startup-focused lender for £1.

European banks posted their worst day in more than a year on Monday due to concerns about contagion and increasing regulation and just some modest profit-taking. Regional banks fell 5.65%, their worst day since March 4, 2022.

While the turmoil this week is not expected to derail the growth of President Christine Lagarde and her governing council, Sylvain Brouer, chief economist for EMEA at S&P Global Ratings, said in a note on Tuesday that the ECB should still “… There’s a battle to be fought.” The problem of inflation which is becoming increasingly domestic.”

Inflation in the euro area remains well above the ECB’s 2% target. February headline inflation came in at 8.5%, higher than the median estimate and slightly lower than January’s 8.6% reading.

Core inflation – the key focus for policymakers right now – accelerated from 5.3% to 5.6%. This is reinforcing expectations that the European Central Bank will have to raise borrowing costs further.

“We recently raised our terminal rate forecast to 3.75% (up by 50bp in March and May and 25bp in June) and widened the main landing zone for terminal rates to 3.50-4.00%,” Deutsche Bank’s Mark Wall said in a note to clients. The key rate of the ECB currently stands at 2.5%.

“Beyond the near-term development of core and underlying inflation, which has yet to peak, the key determinants of the terminal rate – the level of the terminal rate, when it will be reached and how long it will be sustained – are wage growth, fiscal stance and financial position,” he said.

Elsewhere, ECB watchers are also watching for a lack of unity at the Frankfurt institution on when its benchmark rate will fall.

“We think the ECB will need to be clearly committed to another 50bp move in May, given the visible divisions within the Governing Council on next steps,” Paul Hollingsworth, chief European economist at BNP Paribas, said in a research note. There will be a lack of consensus for.” “Recent comments from Council members suggest substantial differences on the extent and pace of future tightening.”

That division is further divided into the classic core versus periphery line within the 20 countries that share the euro. The governor of the Austrian central bank, Robert Holzmann, recently stepped in and said that policy rates are not restrictive until they cross the 4% mark.

This was not well received by his more dovish Italian counterpart, Ignazio Visco, who said that he “does not appreciate my colleagues’ statements about interest rate hikes in the future and for a longer period of time.”

On Thursday, the European Central Bank will also reveal an updated version of its staff’s projections for growth and inflation.

“In our new staff forecast, we expect the ECB to likely slightly raise its growth forecast for this year (due to weaker energy prices) and lower it for 2024-25 (due to policy tightening), while raising its core inflation forecast for this year. And lowering its headline inflation forecast for this year and next year (on the back of weaker energy prices),” said Societe Generale’s ECB watcher Anatoly Annenkov in a note. .