The European Central Bank hiked interest rates by 50 basis points to 3% today (16 March), despite fears that a crisis in Credit Suisse could spread throughout the rest of the financial sector.

Markets reacted passively to the decision, with the Eurostoxx 600 remaining flat following the opening bump the index received following the news that Credit Suisse would receive a $54bn lifeline from Swiss National Bank, which has since declined throughout the day.

The Eurostoxx's banking index is similarly calm, rising 0.7% today.

Katharine Neiss, chief European economist at PGIM Fixed Income, said the decision from the ECB contained "all the key elements" she was looking for.

She highlighted these as the committal to the 50bps hike, with no mention of any accelerating of quantitative tightening and reassurance on liquidity tools and regulatory oversight.

A "notable shift towards a more dovish tone" was also a major part of the statement, emphasising data dependence over signalling future hikes.

Neil Birrell, CIO of Premier Miton Investors, also noted the lack of forward guidance, adding the emphasis on data mean the bank is "very aware" of the financial stresses permeating the markets.

Neiss explained: "This is an important change that opens the door to the possibility this hike may well be the last."

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She argued that following this hike, a shift in macroeconomic fundamentals could warrant an end to the hiking cycle, as the turbulence in the banking sector and lack of overheating within the domestic economy come into focus.

Gabriele Foà, co-portfolio manager at Algebris Investments, agreed, arguing the statement had been "more dovish than expected", due to both the lack of committal to more hikes, and comments on the "soundness" of the European banking sector.

However, he added the ECB was "giving a message of pragmatism", with the priority remaining on inflation while allowing for a quick shift to financial stability if needed. Therefore, he thought rates should gradually move higher, as he expected the banking instability would remain contained.

David Zahn, head of European fixed income, Franklin Templeton, also said that given the Bank's new inflation forecasts of 2.1% and GDP growth of 1.6% in 2025, he anticipated further hikes.

Foà also noted this, as 2024's forecast had been revised 40bps up to 4.6%, while it continued to remain above target throughout the entire forecast horizon.

Zahn added that while he was currently underweight interest rate risk in European accounts, he was looking to build that back towards neutral, as he expected the ECB to over-tighten interest rates due to the inflation target.

Priorities

Seema Shah, global chief strategist at Principal Asset Management, said the decision implied that for the ECB, "inflation concerns are still greater than financial stability concerns".

Shah added that whatever decision the ECB had made, it would have faced some criticism, describing the central bank as being "stuck between a rock and a hard place".

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Richard Carter, head of fixed interest research at Quilter Cheviot, said the ECB had effectively indicated it is "comfortable" with what is happening in the banking sector with the decision.

While Credit Suisse "appears to be teetering on the edge", the rates decision may be a sign the central bank views weaknesses within the sector as isolated incidents, he said.

Birrell agreed, arguing the decision either indicates that fears over a banking crisis are not shared by the central bank, or it sees the threat of inflation as too great not to deal with.

However, Carter added that pressure will be placed on ECB president Christine Lagarde to act quicker than the Bank has done on inflation if prices continue to climb, explaining that it continues to be "behind the curve on rates rises" compared to its UK and US counterparts.

He concluded: "If inflation fails to come down swiftly this year, the bank could find itself with two competing forces - a struggling financial system that will impact on economic growth versus sticky inflation that shows no sign of returning to target."