1 of 3 | European Central Bank President Christine Lagarde opted for a 0.5% increase in lending rates, noting that inflation has been too high for too long. File photo by Kevin Dietsch/UPI |
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March 16 (UPI) -- The European banking sector remains on solid footing, but inflationary strains are enough to warrant a rate hike of 50 basis points, the European Central Bank said Thursday.
"Inflation is projected to remain too high for too long," the bank said in a statement on its monetary policy decision. "Therefore, the governing council today decided to increase the three key ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium-term target."
Bloc-wide inflation is running at 8.5% over the 12-month period ending in January, with food and energy costs contributing to most of the gain. A consumer survey from last week found that median expectations for inflation over the next year declined marginally from 5% to 4.9%, while most felt inflation would be close to the ECB's target rate in three years.
ECB President Christine Lagarde and Vice President Luis de Guindos in a joint statement acknowledged that inflationary pressures were easing somewhat and bank officials expect inflation to come in at 5.3% on average this year and reach 2.1% by 2025.
"At the same time, underlying price pressures remain strong," they said. "Inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, which is higher than foreseen in the December projections."
Energy in particular has been a strain on the European economy given the premium on natural gas prices stemming from supply-side concerns related to the war in Ukraine. Dutch TTF, a European benchmark for the price of natural gas, is trading at around $13 per million British thermal units, compared to $2.40 for the U.S. benchmark, Henry Hub.
More recently, European banks have been ensnared by fears of a banking crisis that followed the collapse of Silicon Valley Bank in California and Signature Bank in New York.
"The euro area banking sector is resilient, with strong capital and liquidity positions," bank officials said.
The market focus shifts now to the U.S. Federal Reserve, which meets next week to consider its next steps in fighting consumer-level inflation.
U.S. inflation moderated somewhat in February, but it remains elevated at 6% over the last 12 months, about three times as high as the Fed's target. Wholesale prices also moved lower.
The U.S. Fed eased back on the steady rate hikes of 75 basis points, or 0.75%, from last year to 25 basis points at the start of 2023.
