ECB increases rates by 0.5 percentage points

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 deposit rate from 2.5 per cent to 3 per cent was in line with what it had been signalling for weeks. But those plans 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.

However, rate-setters ditched their commitment to keep “raising interest rates significantly at a steady pace”, a sign they are unsure about how much further they will increase borrowing costs.

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 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.