Despite the recent turmoil in global financial markets, the ECB made good on its pre-announced intention to raise key interest rates by a further 50 basis points today. The latest tightening puts the key deposit rate at 3.0 percent, the refi rate at 3.5 percent and the rate on the marginal lending facility at 3.75 percent. By delivering on its promise, the bank has made plain its determination to get inflation back under control and will no doubt be hoping that investors will view the move as sign of faith in the health of the domestic banking sector. In any event, the ECB pointed out that Eurozone banking is resilient, with strong capital and liquidity positions, and that its policy toolkit is fully equipped to provide liquidity support if needed.

However, February's forward guidance was not repeated - there was no mention in the policy statement of any expectation to increase rates again at the next meeting in May. Following the surprise jump in core inflation last month, some indication of another hike in rates had been very much of the cards. This suggests that contagion concerns are having at least some impact on the bank's decision making. Indeed, just yesterday Vice President Vítor Constâncio said any hike today should be at most 25 basis points so no doubt there were significant splits over today's tightening.

There was nothing new on QT which began in a passive form at the start of the month. Maturing assets in the Asset Purchase Programme (APP) will be allowed to run off the balance sheet at an average rate of €15 billion a month through June when the disposal rate will be reconsidered. The Pandemic Emergency Purchase Programme remains outside of QT with full reinvestment still scheduled until at least the end of 2024.

The central bank's new forecasts show a more buoyant real economy and have revised away December's projected technical recession. Growth is now put at 1.0 percent this year (after 0.5 percent in December), 1.6 percent (1.9 percent) in 2024 and also 1.6 percent (1.8 percent) in 2025. Risks are tilted to the downside. HICP inflation has been revised lower to 5.3 percent this year (from 6.3 percent), 2.9 percent in 2024 (3.4 percent) and 2.1 percent in 2025 (2.3 percent). However, excluding food and energy, the same period forecasts are initially higher at 4.6 percent (after 4.2 percent in December) and only subsequently lower at 2.5 percent (2.8 percent) and 2.2 percent (2.4 percent). In other words, the revisions leave both the headline and core rates still above the 2 percent target over the entire forecast horizon. Risks here are more balanced. That said, the projections were finalised before the onset of the banking problems and so may need further adjustment.

Financial markets had already responded sharply to the banking disruptions by slashing their expectations for future rate hikes. Just before the news of the U.S. failures and subsequent slump in Credit Suisse shares, 3-month money rates were seen peaking at just over 4.0 percent in September. Now rates are expected to top out around 3.2 percent in July. However, should contagion risks not materialise and inflation fail to behave itself, a more hawkish view could quickly reassert itself. To this end, the ECB re-emphasised the importance of taking policy decisions on a meeting-by-meeting basis. The bottom line for the ECB is that underlying inflation is still moving in the wrong direction and policy has clearly been too loose.

The ECB stated outright in its February announcement that it"intends to raise interest rates by another 50 basis points" at its March meeting. However, following the collapse of SVB and Signature Bank in the U.S. and capital raising problems for Credit Suisse in Switzerland, contagion worries have prompted speculation that the bank might not be so aggressive or even leave rates on hold.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the nineteen presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.