the ECB raises interest rates to 3.5% because inflation is its priority

A couple of weeks ago it was clear that on March 16 the ECB was going to raise interest rates, and half a point was the market consensus. But then came the express bankruptcy of the SVB bank in the US and the whole market assumed that there would be changes.

However, the ECB has kept its plans unchanged. Yesterday the rates rose half a point to 3.5%the highest interest rates in the euro zone since 2008. The ECB’s slap on the table has made one thing clear: inflation remains its main priority.

The markets got it wrong

The bankruptcy of the SVB seemed to change everything. The rapid rise in interest rates of all the central banks of the world had put the banks in trouble. Plans to curb inflation could break things, and things broke in the most worrisome place, the financial system.

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The markets clearly signaled that they believed that the policy of the central banks was going to change, that rate hikes were going to slow down or even stop. The clearest indicator in Europe is the Euribor, which fell hard on Tuesday March 14 by almost half a point: it went from almost touching 4% to 3.5%.

The Euribor always follows the path set by the official interest rates. That it was targeting 4% with rates at 3% indicated that the markets were confident of a rate hike on March 16, but with the SVB crisis the markets came to believe that there would surely be no half-point rate hike. However, they failed.

The ECB has one objective: to moderate inflation

The ECB’s inflexibility makes things very clear: curbing inflation is the main objective of his mandate and is fully committed to it, whether or not there are bank failures. It is also true that the problems of the financial system have not affected any EU bank yet, at the moment they are regional banks in the US and Credit Suisse, which is Swiss.

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This inflexibility of the ECB, by the way, could mean that not as many rate hikes as previously anticipated (or even those that we came to predict based on historical data but which are, right now, taboo) are not necessary. And this is because the moderation of inflation has a lot to do with psychology. If we believe that central banks will do whatever they have to to contain inflation, then inflation will moderate. If we believe that at the first exchange they will change their policy, then inflation will continue to grow.

In the 1980s, rates had to reach 20% for society as a whole to believe that inflation was really going to moderate, that the central banks were serious. Perhaps now, with the ECB raising rates despite bank failures, we don’t need to go that far. Of course we know that your commitment to price moderation is, for now, your priority. We’ll see what the Fed does next Wednesdayalthough the ECB has left the path well marked.

Source: El Blog Salmón by

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