ECB Feared That Ditching Half-Point Hike Might Panic Investors
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Fears that anything but a half-point hike would trigger panic among investors helped settle the European Central Bank’s interest-rate decision on Thursday, according to people familiar with the talks.
As officials met over the past two days, traders were scouring financial markets for signs that other lenders might suffer the same strains that had hammered Credit Suisse Group AG and Silicon Valley Bank. ECB Vice President Luis de Guindos already warned European finance ministers earlier in the week that banks could be vulnerable to rising borrowing costs.
While the ECB dropped language in their Thursday statement on the future path for rates, there remains a live discussion on the need for more increases to bring inflation under control once market turmoil subsides, said the people who declined to be identified because such deliberations are confidential.
Several hawkish officials still see the terminal rate well above the current 3%, the people said, pointing to President Christine Lagarde’s remark that the ECB “would have more ground to cover” if its baseline outlook for the economy were to be confirmed. Yet, some are questioning whether the peak in borrowing costs might now be lower than previously thought.
The beginning of a hiking cycle leads to central banks trying to re-establish credibility they will do what is necessary to combat inflation. That also implies they will accept whatever pain in the economy is necessary to achieve that goal. The end of a hiking cycle forces them to reverse course because the economic pain grows so intense that it overwhelms the desire to appear credible.
The ECB hiked by 50 basis points today and the same logic suggests the Fed will hike by 25 basis points next week. The Euro rebounded from the October lows on the assumption the interest rate differential would close between the EU and the USA. That is close to being achieved.
Therefore the question now is which region will cut rates and flood the market with liquidity first. Right now the USA looking more likely to be close to a peak which is supporting the Euro.