‘No trade off between price stability and financial stability,’ ECB president Christine Lagarde says after rate rise
The recovery in European banking stocks slowed slightly on Thursday afternoon as the European Central Bank (ECB) stuck to its guns and raised interest rates by 50 basis points.
With the meeting taking place amidst a nervous backdrop in the banking sector, ECB President Christine Lagarde said “there is no trade off between price stability and financial stability”.
In the runup to the meeting, markets were increasingly expecting that the central bank might ease off its monetary tightening due to increasing strain in the financial sector. Markets thought there was a 50-50 chance of a 50bps hike in the runup to the meeting having previously considered it a certainty.
But Lagarde was not persuaded. “The banks are in a completely different position from 2008,” she said. “And, you know, crises are never exactly the same anyway.”
She highlighted the regulatory changes that had made the banking sector safer since 2008
Similarly ECB vice president Luis de Guindos said: “The banks are resilient, high capital ratios, robust liquidity buffers, limited exposure to the institutions of the U.S… the banking industry in Europe is resilient.”
While stressing the strength of the sector, Lagarde also affirmed the ECB’s commitment to intervene if trouble arose, saying “we stand ready to provide any kind of additional facilities needed.”
AJ Bell’s investment director Russ Mould said the ECB’s “business-as-usual approach could be seen as a vote of confidence in the European banking sector. If it had changed tack some investors might have taken it as a sign central bankers were seriously concerned about the current situation.”
“That said, the ECB was at pains to make clear that it was acutely aware of current tensions and indicated it was ready and able to step in if things deteriorate further,” he continued.
The reaction of the banking sector was mixed following the decision.
Credit Suisse maintained most of its gains, closing the day 19 per cent higher. Fellow Swiss bank UBS ended up 3.4 per cent, while BNP Paribas climbed 1.4 per cent and Santander rose 2.9 per cent. The Stoxx 600 banking index was up 1.2 per cent.
However, SocGen dropped 0.2 per cent, Deutsche Bank 1.0 per cent and Sabadell was down 0.3 per cent at the end of the day.
While the public comments signalled strength in the sector, Bloomberg reported that de Guindos told European finance ministers on Tuesday that some banks might be at risk due to rising rates.
De Guindos also stressed that lenders were much less exposed than US counterparts, according to people familiar with the talks.
The ECB’s meeting came after a brutal banking rout on Wednesday amidst concerns over the stability of Credit Suisse. Its shares fell as much as 30 per cent due to fears it would run out of cash after its top shareholder said it would not increase its stake in the bank.