European Central Bank (ECB) Hikes Rates Despite Financial Sector Turmoil

Despite concerns about a possible banking contagion following the collapse of two U.S. banks, the European Central Bank (ECB) boosted interest rates by 50 basis points (bps) to the highest level since 2008, saying "inflation is projected to be too high for too long."

However, officials noted that they were monitoring current market tensions closely and stand ready to respond. They said while the "euro area banking sector is resilient," with strong capital and liquidity positions, "the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed."

The ECB has now raised its key lending rate five times since last July as it tries to bring down soaring prices, which were up 8.5% on an annual basis in February. The rate is now at 3% following three consecutive 50-bp hikes. 

Eurozone Inflation Outlook

The bank noted that its outlook for inflation in the eurozone has been lowered to 5.3% this year, 2.9% next year, and 2.1% in 2025, although it added that those estimates were made before the "recent emergence of financial market tensions."

The U.S. Federal Reserve meets next week, and some have suggested because of concerns about the banking sector, policymakers may hold off on increasing borrowing costs as originally anticipated.