After economists and market observers debated all week as to whether central banks should continue to tighten monetary policy considering recent banking issues, the European Central Bank steered the course steady and increased rates 0.50%. The hike takes the headline rate up to 3.5% which has seen over 350bps of increases since July last year.
The market reaction was not as severe as many had expected. An initial mild sell-off in the euro and European equities were soon recovered and both asset classes rallied into the afternoon. Since the announcement, it’s become apparent the ECB was concerned that pausing rate hikes, given how they had communicated this move in previous meetings, would send a negative message to investors and could create more damage.
Following this policy move the ECB will take time to observe developments and has not fully committed to further tightening. This has left them will the necessary breathing room to ensure the current issues are fully resolved before they need to make further decisions.
As the week draws to a close, after enduring extreme volatility from the Sunday evening open, Friday could be on the quieter side with many of the recent issues finding some form of short-term resolution.
Have a great weekend.
Written by Viv Savani. 6:34am, March 17th 2023
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