The European Central Bank has raised interest rates by half a percentage point, sticking to its goal of fighting inflation despite financial turmoil caused by US bank failures and worries about Credit Suisse.

The ECB’s decision to lift its benchmark deposit rate from 2.5 per cent to 3 per cent was in line with what it had been signalling for weeks. However, rate-setters ditched their commitment to keep “raising interest rates significantly at a steady pace” from in the last policy statement, a sign they are unsure about how much further they will increase borrowing costs.

Christine Lagarde, ECB president, suggested some of the 26-person governing council had wanted to stop raising rates as soon as today, saying three or four members thought the central bank should wait for clarity on “how the situation unfolds” in the banking sector before increasing borrowing costs further.

Katharine Neiss, an economist at investor PGIM, said the change in the ECB’s guidance was “a notable shift towards a more dovish tone”, adding that it “opens the door to the possibility that this hike may well be the last — at least for the foreseeable future”.

The central bank also cut its inflation forecasts, but said price pressures were still “projected to remain too high for too long”.

The euro traded between gains and losses against the dollar as Lagarde responded to questions from journalists.

Plans for a half-point rise were thrown into doubt by the recent panic in the banking sector that some observers had thought should persuade the central bank to pause or raise borrowing costs by a smaller amount.

Promising to take a “data-dependent” approach to future decisions, the ECB said it was “monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability”.

As the first major central bank to meet since last week’s collapse of Silicon Valley Bank and Signature Bank raised fears over the stability of the global financial system, the ECB’s decision will be read as an early test of policymakers’ appetite to keep raising rates despite the stress on banks.

The US Federal Reserve and the Bank of England are due to meet next week with analysts divided on whether they will continue to raise rates or adopt a wait-and-see approach while the tumult in the banking sector develops.

Shares in Credit Suisse and other European banks clawed back some earlier losses on Thursday after Switzerland’s second-biggest lender said it would borrow up to SFr50bn ($54bn) from the Swiss central bank and buy back about SFr3bn of its debt in an attempt to boost liquidity and calm investors.

The ECB said eurozone banks were “resilient, with strong capital and liquidity positions”, while emphasising it had the tools to “provide liquidity support” if needed.

The central bank lowered its inflation forecast for this year from the 6.3 per cent expected in December to 5.3 per cent and for next year from 3.4 per cent to 2.9 per cent.

It predicted price growth in 2025 would also be slightly lower than anticipated but remain above its 2 per cent target, at 2.1 per cent. Core inflation, a measure that excludes energy and food prices, would be higher than expected at 4.6 per cent this year, indicating more policy tightening could be required.

“If our baseline was to prevail when the uncertainty reduces, we know we still have a lot of ground to cover,” said Lagarde, while adding that it was “a big caveat” because its forecasts were made on the basis of data before the recent banking turmoil started.

“It’s not business as usual, but the decision we have made is robust,” the ECB president added.

Analysts think the tumult could reduce the need for the ECB to raise rates by making lenders more conservative.

Economists said the recent chaos in the US and European banking sectors meant central banks were entering a new phase in their efforts to tame decades-high inflation and they would now have to balance monetary tightening with measures to preserve financial stability.

Krishna Guha, head of policy and central bank strategy at US investment bank Evercore ISI, said rate-setters would have to show they can “walk and chew gum at the same time — address financial stability concerns with financial stability instruments while using rates to control inflation and so avoid financial dominance”.

Until the past week equity investors were assuming “everything was good and goldilocks”, said Sandra Phlippen, chief economist at Dutch bank ABN Amro. “Now we woke up to the fact that historic inflation and historic hiking paths for over a year are not low risk but a high-risk environment and yes, in such environments incidents happen.”

Jack Allen-Reynolds, an economist at research group Capital Economics, said the ECB had chosen the “riskiest of the available options”, adding that “there is still a lot of uncertainty about whether other banks will be caught up in the storm”.

Thursday’s decision means the ECB has raised its benchmark rate by 3.5 percentage points since last summer — an unprecedented tightening of policy — as it tries to bring eurozone inflation from 8.5 per cent in February down to its 2 per cent goal.

Additional reporting by George Steer

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