European Central Bank officials are about to make one of the most consequential decisions in months as they judge whether market turmoil centering on Credit Suisse Group AG is bad enough to derail a long-touted interest-rate hike.
(Bloomberg) — European Central Bank officials are about to make one of the most consequential decisions in months as they judge whether market turmoil centering on Credit Suisse Group AG is bad enough to derail a long-touted interest-rate hike.
If they deliver the half-point increase that President Christine Lagarde first flagged in December and declared to be “very, very likely” little more than 10 days ago, they risk harsh hindsight judgments should the situation rapidly deteriorate.
Opting for a smaller quarter-point step, as Deutsche Bank and Bloomberg Economics now predict, or even less by staying on hold, could delay their effort to tame surging inflation.
At the pre-decision dinner in Frankfurt where policymakers speak their minds, and at the more formal discussions on Thursday, they can consider advice from two former senior ECB officials to pare back their plans, along with investor expectations that have rapidly shifted too.
The Governing Council can also weigh the evidence that the consumer-price shock bearing down on the region is still very real, after inflation figures for February showed underlying price pressures surged to a new record.
The cruel irony is that neither Silicon Valley Bank in the US nor Switzerland’s Credit Suisse — both the focus of the current turmoil — are within their euro-zone domain. And yet it’s the ECB, and not the Federal Reserve — scheduled to meet next week — that’s having to make the first call on the dangers posed.
“We have systemic financial problems, but we’re also in a situation where inflation is still way too high, and the idea that this financial stress is going to cause inflation to drop is not yet in the economic data,” Nouriel Roubini, a famed commentator on the 2008 financial crisis and chairman of Roubini Macro Associates LLC, told Bloomberg Television. “So there is a dilemma for central banks.”
It’s a reflection of that dilemma that investors have split the difference and priced in a smaller move on Thursday, a view ratified by Bloomberg Economics.
“Is Credit Suisse too big to fail? Maybe, but it’s certainly too big to ignore,” economists David Powell, Maeva Cousin and Jamie Rush said in the note changing their call. “Bloomberg Economics now expects the Governing Council to be more cautious.”
Earlier on Thursday, former Executive Board member Lorenzo Bini Smaghi — who’s now chairman of Societe Generale SA — counseled his successors to either postpone the half-point hike or else halve it. His former colleague Vitor Constancio agreed, saying on Twitter that officials should hike by 25 basis points at most.
The risk, according to Bini Smaghi, would be to repeat the mistake the ECB made when he was in office in 2011, raising borrowing costs only to have to reverse the move in due course. That echoed another such situation three years previously.
“Hiking rates – either the ECB hiking rates this week or the Fed hiking rates next week – has the potential to be the greatest gaffe since the ECB hiked rates in June 2008,” Bob Michele, chief investment officer at JPM Asset Management, told Bloomberg Television.
An alternative view is that tensions around individual banking stocks aren’t a reflection of malaise within the euro-zone system and that officials shouldn’t overreact. That’s what another former ECB policymaker reckons.
“Credit Suisse is a single issue, is the issue of a banking problem, which is also not a euro bank,” Gertrude Tumpel-Gugerell said in an interview. “There is uncertainty because there is the SVB problem in the US, but this is also very much a regulatory issue. I think one should distinguish the fight against inflation from the regulatory issues.”
The decision will emerge at 2:15 p.m. Thursday in Frankfurt, followed by a press conference presented by Lagarde.
–With assistance from Alix Steel, Tom Keene, Jonathan Ferro, Guy Johnson, Lisa Abramowicz and Christopher Anstey.
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