ECB hikes interest rates to highest level since financial crisis, ignoring market turmoil centred on Credit Suisse and European banks

The European Central Bank (ECB) today hiked interest rates 50 basis points despite concerns about Credit Suisse’s finances sparking turmoil in the bloc’s banking market.

President Christine Lagarde and co’s move was in line with expectations and takes Euro borrowing costs to three per cent, the highest level since the financial crisis in 2008.

Markets had been mulling whether the central bank of the 20 countries using the euro would climb down from its strong commitments to raise rates by a steeper amount to avoid amplifying volatility in the European sector.

Lagarde has repeatedly said the ECB will deliver several 50 point rises this year to tame inflation.

Investment banking giant Credit Suisse’s shares yesterday tumbled as much as 30 per cent due to fears it would run out of cash after a top investor said it is unprepared to pump any more money into the firm.

Fellow European banks suffered some of their worst days in recent memory, with Deutsche Bank, BNP Paribas and Societe Generale all suffering bleak losses.

The slide was preceded by US lender Silicon Valley Bank (SVB) last week collapsing after its finances buckled due to the sharp drop in bond prices over the last week sucking capital out of its balance sheet.

That failure has prompted investors to sweat over whether other big banks could break if monetary authorities continue to hike rates aggressively.

Just a couple days before SVB’s failure, US Federal Reserve chair Jerome Powell signalled he and the federal open market committee could return to steeper 50 basis point hikes at their meeting on 21-22 March. Markets now think a 25 point rise is more likely.

ECB officials moved to quash market concerns about Credit Suisse and other European lenders.

“The euro area banking sector is resilient, with strong capital and liquidity positions,” they said in a statement which announced the interest rate decision.

The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” the central bank added.

Credit Suisse late last night announced it has received an around £45bn loan from the Swiss central bank to shore up its finances, which sent its share up a fifth today.

ECB staff reckon inflation will average more than five per cent this year, prompting the aggressive rate hike campaign.

Euro borrowing costs had actually been negative for several years prior to the inflation surge in a bid stimulate demand after the debt crisis in the early 2010s.