Silicon Valley Bank collapse throws up uncertainty for a European Central Bank hoping to hike rates

FRANKFURT — The European Central Bank is expected to still hike rates by another 50 basis points on Thursday despite financial stability concerns being firmly back on the table with the collapse of Silicon Valley Bank in the U.S.

European markets closed sharply lower Monday amid the fallout from the SVB crisis. On Friday, SVB was taken over by regulators after massive withdrawals a day earlier effectively created a bank run. HSBC then on Monday agreed to buy the British arm of the troubled U.S. tech startup-focused lender for £1.

Concerns of contagion and increased regulation and just some general profit-taking caused European banks to post their worst day in more than a year on Monday. Regional banks fell 5.65%, their worst day since March 4, 2022.

But the turmoil is not expected to derail President Christine Lagarde and her Governing Council’s hike this week, according to analysts, with Sylvain Broyer, chief economist for EMEA at S&P Global Ratings, saying in a note Tuesday that the ECB still “has to fight an inflation problem that is becoming increasingly homegrown.”

Inflation in the euro area remains much higher than the ECB’s 2% target. February headline inflation came in at 8.5%, higher than the medium estimate and only slightly lower than January’s 8.6% reading.

Core inflation — the key focus right now for policymakers — accelerated to 5.6% from 5.3%. That is reinforcing expectations that the European Central Bank will have to push borrowing costs ever higher.

“We recently raised our terminal rate forecast to 3.75% (50bp hikes in March and May and 25bp in June) and lifted the main landing zone for terminal to 3.50-4.00%,” said Mark Wall with Deutsche Bank in a note to clients. The ECB’s key rate currently stands at 2.5%.

“Beyond the near-term evolution of core and underlying inflation, which has yet to peak, the key determinants of the terminal rate – the level of the terminal rate, when it will be reached and how long it will be maintained – are wage growth, the fiscal stance and financial conditions,” he said.

Elsewhere, ECB watchers are also monitoring a lack of unity at the Frankfurt institution when it comes to what level its benchmark rate will peak at.

“We think the ECB will lack the consensus to explicitly commit to another 50bp move in May, given the visible divisions within the Governing Council on next steps,” said Paul Hollingsworth, chief European economist at BNP Paribas, in a research note. “Recent comments from council members suggest substantial differences over the extent and pace of future tightening.” 

That division is again split down the classic core vs. periphery line within the 20 nations that share the euro. The Austrian central bank governor, Robert Holzmann, recently stepped out and said that policy rates are not restrictive until they pass the 4% mark.

That was not received well by his more dovish Italian counterpart, Ignazio Visco, who said that he doesn’t “appreciate statements by my colleagues about future and prolonged interest rate hikes.”

On Thursday, the European Central Bank will also reveal an updated version of its staff projections for growth and inflation.

“In its new staff forecasts, we expect the ECB to possibly raise its growth projections slightly for this year (weaker energy prices) and reduce it for 2024-25 (due to the policy tightening), while raising its core inflation forecast for this year and lowering its headline inflation forecast for this year and next (on the back of weaker energy prices),” said Anatoli Annenkov, an ECB watcher with Societe Generale, in a note.