Europe | ECB sticks to the manual

Summary

The European Central Bank (ECB) had to make a decision in difficult circumstances on Thursday, amid strong financial market turmoil and with the banking sector in the eye of the storm. It raised rates by 50 basis points to 3.50%.

Key points

• Key points:
• The decision was easy in theory, because with the ECB's main mandate being price stability, and with inflation still well above target, there was little room to deviate from the commitment made in February.
• But it was a complicated decision in practice because it was taken against a background of a looming risk of financial instability.
• In a good pedagogical exercise, Christine Lagarde explained that as far as the ECB is concerned there is no contradiction between price stability and financial stability. They are simply two different objectives that will be addressed with separate instruments (interest rates and liquidity lines, respectively).
• The ECB showed more flexibility and gave no guidance on next moves, thus taking good note that it is not advisable to commit ex-ante in such an uncertain environment, and made clear that it is ready to use whatever instruments are necessary if liquidity problems arise.
• Even so, the ECB will be monitoring financial conditions, which ultimately condition the economic scenario and the outlook for inflation.

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