The European Central Bank is ready to “respond as necessary” to maintain stability in the eurozone, President Christine Lagarde has pledged amid persistent market turmoil across Europe’s banking sector.
Lagarde, however, admitted the real extent of the ongoing tensions remained “to be seen” but would probably lead to “tighter” conditions for lending.
“We are monitoring market development closely and stand ready to respond as necessary to preserve price stability and financial stability in the euro area,” Lagarde said on Monday afternoon.
“The euro area banking sector is resilient, with strong capital and liquidity positions.”
Financial markets have been in disarray since the collapse of two mid-size American banks, Silicon Valley Bank and Signature Bank, earlier this month.
Europe was further roiled after a dramatic plunge in the stock of Credit Suisse, Switzerland’s second-largest bank, following a refusal from its main shareholder, Saudi National Bank, to provide fresh aid.
The drop in value raised the alarm of a possible domino effect and forced the Swiss authorities to intervene in an unprecedented manner, pushing UBS to acquire its long-time rival, Credit Suisse, for $3.25 billion or around EUR3.05 billion.
“I welcome the swift action and the decisions taken by the Swiss authorities,” Lagarde told Members of the European Parliament.
“These actions were instrumental for restoring orderly market conditions and ensuring financial stability.”
Meanwhile, the European Central Bank, together with five other central banks, announced coordinated action to facilitate access to dollars and ensure liquidity across the banking system.
However, neither the Bern-brokered deal nor the joint plan managed to quell the growing anxiety among investors. Shares of European banks continued to drop on Monday, with Deutsche Bank, BNP Paribas, HSBC and Barclays all hit by the turbulence.
Speaking before the European Parliament, Lagarde sought to reassure policymakers, carefully choosing her words to prevent fuelling the ongoing jitters.
“We are very confident that our banking sector is solid and well-capitalised, has strong liquidity ratios, and that the rules that apply in Europe (…) are not the rules that have been applied by other institutions, notably by the Swiss authorities,” Lagarde said.
“Switzerland does not set standards in Europe.”
Lagarde added that should the current tensions were to impact Europe, it would “probably” lead to tighter conditions for borrowing and lending, a trend already noticeable as a result of the ECB’s policy.
“Those financial tensions will have an impact. Which one, for how long, how deep, obviously remains to be seen,” she said.
The ECB chief insisted interest rates were the “primary tool” to return inflation to the annual target of 2%, a figure the eurozone now vastly exceeds.
The latest reading showed inflation at 8.5% in February, with core inflation, a measure that excludes the volatility prices of energy and food, climbing up to 5.6% – an all-time record.
The numbers led the ECB to hike rates by 50 basis points earlier this month, despite the collapse of the American banks and the ensuing turmoil.
Lagarde called the move a “robust decision that needed to be taken” but noted the institution she leads would keep an “open-minded.”
The ECB’s deposit rate now stands at 3% – the highest level since 2008.
Asked if the latest developments would have an impact on the ECB’s monetary policy, Lagarde said it was “more proportionate” and “more sensible” for the bank to avoid a new clear-cut commitment to hike interest rates in the next of its Governing Council, as it had done in previous occasions.
“There’s no trade-off between price stability and financial stability,” Lagarde told MEPs.
“We’re not compromising on one because of the other. We address them with different sets of tools.”