The ECB is in no rush to squeeze credit as the outlook for Europe’s economy is clouding over

European markets rose as investors hailed recent evidence that the European Central Bank (ECB) is in no rush to hike interest rates, despite ongoing increases in inflation.

The ECB confirmed that it will taper its stimulus to the economy over the coming months, but gradually and with interest rate hikes that will start again later.

This is in contrast to central banks in the US, UK and other countries, some of which have raised interest rates several times over the past few months to limit the rise in the cost of living.

The ECB is scaling back so-called quantitative easing, its massive bond-buying program that underpins low borrowing costs.

That should push up countries’ borrowing costs, but probably not aggressively. Inflation data has prompted central bankers in Germany, the Netherlands, Austria and Belgium to hike rates sooner rather than later, but collective sentiment from Frankfurt at a regular ECB meeting yesterday contrasted the inflation numbers with the decline in business and consumer confidence suffered since then Russian invasion of Ukraine and other growth risks.

The latest message from ECB Chief Economist Philip Lane has emphasized that the main inflationary pressures are temporary and related to supply chain dislocations rather than financial conditions.

In this scenario, a rate hike risks raising the cost of borrowing for businesses and households already heading into an economic slowdown without alleviating the underlying causes of inflation.

At home, that cautious outlook on the economy appears to be shared by the Central Bank of Ireland, which has left a key mechanism to support bank lending unchanged at levels first set at the start of the pandemic.

In a March 22 note published on the central bank’s website yesterday, regulators said they are keeping their countercyclical capital buffer (CCyB) at zero, despite warning last November that it would rise this year.

The buffer is a part of banks’ capital that must be held in addition to the standard requirements – in practice, an up and down movement determines whether banks can lend more or less in a given period.

Keeping the buffer at zero allows banks to lend more.

“While this guidance stands, the current outlook is subject to significant uncertainty and the impact of the conflict in Ukraine on macro-financial conditions, as well as the impact of related economic sanctions and global trade disruptions, will continue to be closely monitored,” it said. The ECB is in no rush to squeeze credit as the outlook for Europe’s economy is clouding over

Fry Electronics Team

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