ECB’s hawkish plans set to face bolder opposition on SVB fallout

THE EUROPEAN Central Bank’s (ECB) plans for more big interest rate hikes are set to meet stronger opposition this week after the collapse of Silicon Valley Bank (SVB), according to officials with knowledge of the matter.

Dovish policy makers are likely to argue that the economic environment has shifted and that more caution is warranted, the people said, declining to be identified because such discussions are confidential.

That would contrast with the hawkish momentum that had been building in the wake of faster-than-anticipated underlying inflation data this month.

While investors have ramped up their bets that the ECB will row back on its commitment for a half-point increase this week, the officials said there’s no reason to believe at this stage that a majority of the Governing Council will be persuaded to change those plans, and the debate may ultimately still focus more on the wisdom of signaling future hikes.

Investor expectations of ECB policy have already shifted as part of the global financial-market fallout after SVB’s denouement, with traders now assessing the odds of a half-point hike at under 50%. They now see the deposit rate peaking at 3.4%, some 80 basis points lower than a week ago.

A half-point increase on Thursday has been so consistently flagged since early February that the recent focus of officials’ debates had moved on to focus on the prospect of a similar move in May. Just last week, ECB President Christine Lagarde emphasized that 50-basis-point (bp) step on March 16 was “very, very likely.”

It’s possible officials would want to signal in advance of that decision if there’s a chance that such a large move may no longer be appropriate. In July 2022, the prospect of a 50-bp rate hike emerged only two days before it then materialized.

Asked at the Feb. 2 press conference about what could derail a move of that size this week, Ms. Lagarde suggested that only an exceptional situation would do so.

“I can’t think of scenarios, unless they were quite extreme, where that would not happen,” she said.

Earlier Monday, Bloomberg Economics said the banking turmoil lowers the chance that policy makers will use this week’s decision to signal another big increase in borrowing costs for its subsequent gathering.

“Coming so close to this month’s meeting, uncertainty surrounding SVB will reduce the appeal of pre-committing to a 50-basis-point hike in May,” said Jamie Rush, chief European Economist at Bloomberg Economics. “We now expect the ECB to avoid sending a concrete signal.”

European Union ministers meeting in Brussels are discussing the SVB collapse. Paschal Donohoe, president of the Eurogroup, which brings together the currency bloc’s finance chiefs, insisted to Bloomberg Television that the euro zone has very limited exposure to the failure.

Italian Finance Minister Giancarlo Giorgetti said he has confidence in European authorities and hinted that the ECB may take stock of the impact on its rate-setting.

“We appreciate the speed with which US authorities have intervened,” he told reporters. “We are confident that, if needed, European authorities will also intervene with the same speed, and will evaluate any implications for the conduct of monetary policy and for financial stability.”

His Spanish colleague, Nadia Calvino, offered similar thoughts on the ECB’s stance.

“The increased volatility in world markets calls for extreme prudence on the side of financial institutions as well as those responsible for fiscal and monetary policy on both sides of the Atlantic,” she said. — Bloomberg