Both the Fed, the ECB, and the Fed had been expected to raise their rates by 50bps each until Friday. President Lagarde confirmed that a half point was being planned for the ECB. Doubts arose around possible changes to the QT program.
The collapse of three US regional banks has led to the consensus that the Fed will not raise its rates. There is even a growing consensus that the Fed won’t hike at all. What about the ECB? EU leaders repeatedly assured the media that no European bank was exposed to SVB and that the financial sector is strong.
How certain can we be?
It turns out that the same phenomenon that put the banks in a situation where they needed to be seized to protect client deposits was also present in Europe. The Fed has been faster to raise its rates than the ECB at this point. This may not be the case. It is also a similar dynamic that led to the “flash crash” back in September with the UK’s disastrous “mini-budget.”
For a prolonged period, interest rates in the EU were very low. European banks therefore have large portfolios of low to negative-interest loans. This debt is losing value as the ECB increases its interest rates.