Europe's central bank backs big rate hike despite bank chaos

FRANKFURT, GERMANY >> The European Central Bank carried through with a large interest rate increase Thursday, brushing aside predictions it might dial back as U.S. bank collapses and troubles at Credit Suisse feed fears about the impact of higher rates on the global banking system.

The ECB hiked rates by half a percentage point Thursday, underlining its determination to fight high inflation of 8.5%. In a statement, the bank called the banking sector in the 20 countries using the euro currency “resilient,” with strong finances.

“We are monitoring current market tensions closely and stand ready to respond as necessary to preserve price stability and financial stability,” ECB President Christine Lagarde said at a news conference. Later adding, “I think that the banking sector is currently in a much, much stronger position than where it was back in 2008” during the global financial crisis.

The message follows Silicon Valley Bank in the U.S. going under last week after suffering losses on government-backed bonds that fell in value due to rising interest rates. Then, globally connected Swiss bank Credit Suisse saw its shares plunge this week and had to turn to the Swiss central bank for emergency credit.

The troubles at Credit Suisse dragged down the shares of stalwart European lenders such as Deutsche Bank, BNP Paribas and Societe General on Wednesday. Bank shares recovered Thursday.

Analysts say the share selloff was fed by investor fear that banks took added risks to increase investment returns during years of very low interest rates and some may have failed to safeguard themselves against those holdings turning sour as rates rise.

Lagarde said “inflation is projected to remain too high for too long” and that further hikes will be based on what the numbers show.

Similar questions are being raised about what the U.S. Federal Reserve will do at its rate meeting next week.

European finance ministers have said that their banking system has no direct exposure to the failures of Silicon Valley Bank and others in the U.S.