Christine Lagarde has acknowledged that turmoil within the banking sector might drive the European Central Financial institution to cease elevating rates of interest, ought to the current market jitters hit lending to the eurozone’s companies and households.
The ECB president instructed MEPs on Monday that eurozone banks had “very restricted publicity” to Credit Suisse after it was taken over by its rival UBS in a weekend rescue deal that imposed losses on shareholders and worn out SFr16bn of dangerous extra tier 1, or AT-1, debt.
“We aren’t speaking about billions [of exposure to Credit Suisse] right here, we’re speaking about hundreds of thousands,” Lagarde mentioned, including that the eurozone banking system was “robust when it comes to its combination capital and liquidity place”.
Nonetheless, Lagarde warned that the turmoil risked worsening a current contraction within the provide of credit score.
“We’re already seeing some tightening of economic situations,” Lagarde mentioned. “That may be accentuated by the tensions within the banking system and we must take that under consideration as a part of the info we assessment as a part of our subsequent financial coverage determination.”
Whole eurozone lending by banks within the bloc contracted by €61bn between January and February, the most important month-to-month decline since 2013.
The ECB mentioned in January that its quarterly survey of lenders showed they’d tightened their lending standards on enterprise loans by essentially the most because the area’s sovereign debt disaster in 2011. Demand for mortgages fell on the quickest tempo on file.
The tensions over the previous two weeks had been “not trivial”, Lagarde mentioned, including that the collapse of Silicon Valley Bank within the US and disaster at Credit score Suisse would “not be with out repercussions”. She warned banks would want to organize for “a probably much less beneficial setting” owing to decrease progress, rising funding prices and better defaults.
The ECB final week raised charges by half a share level, taking its deposit charge to three per cent, to sort out inflation that is still greater than 4 instances above its 2 per cent goal.
The choice got here regardless of requires it to pause to see how the turmoil within the banking system performs out. Markets are pricing in a excessive likelihood that final week’s charge enhance will likely be adopted by a pause by the ECB at its subsequent coverage assembly on Could 4.
The US Federal Reserve and Financial institution of England are resulting from announce their charge choices later this week.
“There might come a degree the place central banks haven’t any selection however to let inflationary considerations take a again seat and minimize rates of interest to shore up confidence,” mentioned Vicky Redwood, a former Financial institution of England official who advises analysis group Capital Economics.
Nonetheless, Lagarde repeated that there was “no trade-off” between combating inflation and sustaining monetary stability. She mentioned the ECB was “prepared to reply as mandatory” to protect value and monetary stability within the euro space. It was monitoring markets and its toolkit was “absolutely geared up to offer liquidity help to the euro space monetary system if wanted”.
She additionally mentioned eurozone lenders had been “nicely supervised”, with greater than 2,200 banks in Europe lined by Basel III guidelines requiring them to take care of a minimal stage of liquid property. Within the US, fewer banks are required to satisfy globally-agreed Basel requirements, with solely the most important lenders needing to comply with the foundations.
