The European Central Bank raised interest rates by 50 basis points on Thursday as promised to curb inflation, ignoring financial market chaos and calls by investors to dial back policy tightening at least until sentiment stabilises.
The ECB has been raising rates at its fastest pace on record, but a rout in global markets since the collapse of Silicon Valley Bank (SVB) in the United States last week had threatened to upend those plans at the last moment.
In line with its often-repeated guidance, the central bank for the 20 countries that share the euro lifted its deposit rate to 3%, the highest level since late 2008, as inflation is seen overshooting its 2% target through 2025.
"Inflation is projected to remain too high for too long," ECB President Christine Lagarde told a news conference, reading from the statement agreed by the bank's policymakers.
"The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area," she said, while adding that the region's banks had strong capital and liquidity positions.
The statement offered no commitments for the future, despite previous calls by a long list of policymakers for more big moves in the fight against inflation.
"We know that if our baseline were to persist when the uncertainty reduces, then we have a lot more ground to cover," Lagarde said.
"But it's a big caveat, 'if our baseline was to persist'," she added, noting that it was currently impossible to determine the future path of interest rates amid "completely elevated" uncertainty stemming from the market ructions.
The euro and bond yields edged up after the move. Earlier, after days of turmoil in markets, financial investors had seen a 50% chance of a smaller, 25 basis point move by the ECB and dialled down expectations for future moves.
Lagarde emphasised that the banking sector as a whole was in a "much, much stronger position" than it was at the point of the 2008 financial crisis. Euro zone bank shares nonetheless hit two-month lows after the rate move before partially recovering.
Those bank shares had been in freefall this week, spooked first by SVB's collapse, then a plunge in the value of Credit Suisse, a lender that has long been dogged by problems.
But the Swiss National Bank threw Credit Suisse a $54 billion lifeline overnight, a big enough show of force to send its shares back up around 20% and lift other bank stocks.
The key worry for the ECB is that monetary policy works via the banking system, and a full blown financial crisis would make its policy ineffective.
That left the ECB in a dilemma, pitting its inflation-fighting mandate against the need to maintain financial stability in the face of overwhelmingly imported turmoil.
ECB Vice-President Luis de Guindos said euro zone exposure to Credit Suisse was "quite limited" and Lagarde noted that in any case, the policy tools the ECB had at its disposal meant there was no trade-off between financial and price stability.
Inflation, the bank's primary responsibility, is far higher than in previous crises and the ECB's new projections, published on Thursday, put price growth above its 2% target through 2025, an overriding concern for many of its policymakers.
Inflation is seen averaging 5.3% this year, 2.9% in 2024 and 2.1% in 2025, the ECB said, adding that these projections were finalised before the current turmoil.
Lagarde noted the bank was starting to see signs that its policy tightening was having an impact on the economy, notably through credit channels.
While systemic banking crises generally morph into deep recessions, the euro zone's financial system is in its best shape in years, with capital, liquidity and profits all at healthy levels.
Some economists also argued that the ECB has plenty of instruments to fight market stress, and so had not needed to sacrifice the rate move to keep financial assets buoyant.
That was echoed in the ECB statement, which noted its policy toolkit was "fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy".