European Central Bank (ECB) president Christine Lagarde has again insisted there is no conflict between monetary tightening and financial market stability while warning European banks to prepare for tougher times ahead.
In an address to the European Parliament’s Committee on Economic and Monetary Affairs, she said Frankfurt would not be deflected from its inflation-taming mission by the current string of high-profile banking blowouts.
“Price stability goes with financial stability, and they are both present and come together – but there is no trade-off,” Ms Lagarde said.
She was speaking as details of the deal to save Credit Suisse, involving the wipeout of some €16.2 billion of Credit Suisse AT1 bonds, sent ripples of panic through markets.
“We are monitoring market developments closely and stand ready to respond as necessary to preserve price stability and financial stability in the euro area,” she said, insisting the euro zone banking sector was resilient, with strong capital and liquidity positions.
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She was appearing before the committee to provide context for the ECB’s decision last week to raise interest rates by a further 0.5 per cent.
“As inflation is projected to remain too high for too long, the Governing Council last week decided to increase the three key ECB interest rates by 50 basis points, in line with our determination to ensure the timely return of inflation to our 2 per cent medium-term target,” she said.
The ECB’s latest economic projections – which were finalised before the failure of Silicon Valley Bank and UBS’s agreed takeover of embattled rival Credit Suisse – see inflation closer to the central bank’s 2 per cent target by 2025, but still lingering above it.
Amid the uncertain climate, Ms Lagarde warned banks to brace themselves for slower economic growth, higher funding costs and lower lending volumes.
“Individual financial institutions should carefully preserve their current levels of resilience, to ensure that they could weather a potentially less favourable environment,” she told European Parliament MPs.
“We are using the interest rates that we have and this was the case last week, this was the case before because we have enough ground to cover to move at the pace where we are moving,” Ms Lagarde said.
“As far as financial stability is concerned, we have all the tools that will be needed,” and “those tools will be used if necessary,” she said. – Additional reporting by Reuters