ECB Risks Policy Error by Hiking Into a Banking Storm
The euro zone’s central bank is dangerously complacent in continuing to tighten monetary policy during a bank liquidity crisis.
European Union flags outside the headquarters of the European Central Bank in Frankfurt, Germany.
Photographer: Alex Kraus/BloombergThe European Central Bank's governing council was set on autopilot to hike the official deposit rate by 50 basis points to 3%, and it duly delivered its sixth consecutive hike since July at Thursday's meeting. While inflation remains a clear and present danger, the central bank is dangerously complacent in ignoring the current banking storm. The euro’s failure to rally against the dollar, despite a bigger rate increase than some had expected, suggests traders are concerned about a possible policy mistake.
Carrying on regardless highlights the growing risk of overtightening policy in the euro region. Quite what the ECB expects to achieve by not offering any guidance whatsoever about what happens next is beyond me. “It is not possible to determine at this point in time what the path will be going forward,” ECB President Christine Lagarde said at the press conference following the decision. The market may well interpret that as suggesting rates won’t go much higher; but it’s no way to communicate policy intentions.