# Big ECB hike adds fuel to the banking sector fire Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2023-03-16 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Euro Zone Bank Shares Hit Ten-Week Low After ECB Rate Hike Meta Description: European bank shares hit a ten-week low after the ECB raised rates by 50 bps, causing turmoil in financial markets. Stay informed with Reuters. URL: https://financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-firehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2023-03-15t082611z1lynxmpej2e0afrtroptp4france-economy-inflation-1736814307916-compressed.jpg) By Joice Alves LONDON (Reuters) – Euro zone bank shares hit a ten-week low on Thursday after the European Central Bank (ECB) raised rates by half a point, even though some investors had thought the turmoil in financial markets would deter it from delivering another hefty hike. The rising cost of borrowing added pressure on banks, already in turmoil following the collapse last week of Silicon Valley Bank (SVB) and a crisis at Credit Suisse, which sent its shares to record lows on Wednesday. As forecast by a Reuters poll, the [ECB raised its benchmark interest rate](https://www.financedigest.com/fed-rates-up-boe-up-ecb-up-stocks-up.html "Fed rates up, BoE up, ECB up, stocks up") by 50 basis point (bps) to 3%, its highest level since late 2008. But over the past few days, money markets had started to price in the possibility of a 25 bps move amid concerns over the [banking sector](https://www.financedigest.com/how-effective-talent-management-could-disrupt-the-retail-banking-sector.html "HOW EFFECTIVE TALENT MANAGEMENT COULD DISRUPT THE RETAIL BANKING SECTOR"). The [ECB hike](https://www.financedigest.com/instant-view-ecb-sticks-with-big-rate-hike-even-as-bank-fears-roil-markets.html "Instant View: ECB sticks with big rate hike even as bank fears roil markets") has come as somewhat of a surprise, especially given the events of the last few days. The problem being that European [banks were forced to load up on bonds in order to meet](https://www.financedigest.com/banking-stability-worries-go-behind-closed-doors-at-imf-world-bank-meetings.html "Banking stability worries go behind closed doors at IMF-World Bank meetings") capital requirements, and the higher interest rates go, the less these bonds are worth, so hence the negative reaction here,” said Michael Field, European Equity Strategist at Morningstar. An index of [euro zone](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") banks fell by as much as 1.2% to its lowest since Jan. 2 in the minutes after the decision. After five consecutive monthly gains, the index is now set for its [biggest monthly drop since](https://www.financedigest.com/uk-firms-plan-biggest-pay-rises-since-2012-to-fill-staff-gaps.html "UK firms plan biggest pay rises since 2012 to fill staff gaps") the first COVID-19 lockdowns in 2020. Underscoring the febrile state of markets, however, [euro zone banks](https://www.financedigest.com/dollar-outshines-euro-sterling-amid-european-bank-jitters.html "Dollar outshines euro, sterling amid European bank jitters") later recovered ground, with the index closing up 1.35%. The ECB lifted its growth outlook for the euro area and said the region’s [banks were in a much stronger position than they were during the 2008 financial crisis](https://www.financedigest.com/how-the-2023-banking-crisis-unfolded.html "How the 2023 banking crisis unfolded"). [“Central banks](https://www.financedigest.com/central-banks-keep-hiking-rates-amid-banking-turmoil.html "Central banks keep hiking rates amid banking turmoil") have a real dilemma that they have a core mandate, which is inflation. But there’s also a [challenge now post-SVB and given banking](https://www.financedigest.com/big-banks-can-be-challengers-too.html "Big banks can be challengers too") volatility,” said Justin Onuekwusi, Head Of Emea Retail Investments at Legal & General Investment Management in London. “We have seen volatility and likely to see greater volatility”. [Ratings agency Moody’s said on Thursday Europe’s banking](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") systems remained in fundamentally good health. Having a lower proportion of their [assets in bonds](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way") means Europe’s lenders are less exposed to fluctuating interest rates than their U.S. counterparts, Nick Hill, a [managing director](https://www.financedigest.com/anya-libova-joins-apester-as-uk-managing-director.html "Anya Libova joins Apester as UK Managing Director") at Moody’s, told investors and reporters. Graphic: The race to [raise rates](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll") – https://www.reuters.com/graphics/GLOBAL-MARKETS/jnpwyjemkpw/chart.png ![](https://onlineworldnews.com/wp-content/uploads/2023/03/15.jpg) INSTABILITY The ECB has raised interest rates since July at its fastest pace on [record to curb inflation](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc.html "UK shop price inflation hits record 8% in January: BRC"). It had effectively promised another 50 bps [increase for Thursday and signalled further moves](https://www.financedigest.com/italys-brembo-to-move-to-amsterdam-to-increase-ma-options.html "Italy’s Brembo to move to Amsterdam to increase M&A options") in the months ahead. The [rising systemic risk investors](https://www.financedigest.com/stocks-rise-after-bank-sale-fuels-investor-risk-appetite.html "Stocks rise after bank sale fuels investor risk appetite") have endured over the past five days does not make the ECB flinch,” said Florian Ielpo, head of macro and multi asset at Lombard Odier Asset Management in Geneva. [“Inflation remains too high to be ignored and the risk to unwind what the ECB](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB") has started is worth the resulting financial instability for now,” he added. The [euro’s reaction to the decision](https://www.financedigest.com/sterling-hits-five-month-high-against-euro-before-boe-decision.html "Sterling hits five-month high against euro before BoE decision") was fairly muted. It was last [trading 0.35% higher on the day](https://www.financedigest.com/stocks-fall-treasury-yields-rise-upon-final-2022-trading-day.html "Stocks fall, Treasury yields rise upon final 2022 trading day") at $1.0616. On Wednesday, the currency [hit its lowest](https://www.financedigest.com/uk-mortgage-approvals-hit-lowest-since-june-2020.html "UK mortgage approvals hit lowest since June 2020") against the U.S. dollar [since early](https://www.financedigest.com/first-quarter-dash-for-cash-largest-since-early-2020-bofa.html "First quarter ‘dash for cash’ largest since early 2020 -BofA") January, at $1.0516. Germany’s 2-year bond yield initially fell after the [central bank](https://www.financedigest.com/central-banks-hike-rates-again-but-a-pause-is-coming.html "Central banks hike rates again, but a pause is coming") decision. It was last up 22 bps on the day to 2.5820%. Euro zone government bond yields and the single currency had already rebounded earlier on Thursday after [Credit Suisse said it would borrow up to $54 billion from the Swiss central bank](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") to shore up liquidity and restore investor confidence. (Reporting by Joice Alves; Editing by Amanda Cooper and Mark Potter) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---