Despite financial market turmoil, the European Central Bank (ECB), has continued its fight against inflation by imposing a large number of interest rate increases.

The effect of rising interest rates has had a negative impact on bank balance sheets, leading to recent crises at Credit Suisse and Silicon Valley Bank.

The central bank, which is responsible for monetary policies in 20 countries that use the euro as their currency, stuck to its original plan of tackling inflation with rate rises.

Last week. It was widely expected that it would impose the 0.5 percent point increases across its three main interest rate rates in order to continue its fight against inflation.

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On Wednesday, market speculation grew that it would avoid such rises due to the market chaos that had taken place in the wake Silicon Valley Bank‘s collapse. This has impacted the stock prices of all major European banks.

It culminated with a collapse of shares in Credit Suisse, a major Swiss lender. Credit Suisse later took a financial support in order to boost confidence.

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According to the ECB, it made its decision because inflation is expected to stay too high for too much time. It described its banking system as resilient despite warning EU politicians about some banks in the euro area being vulnerable.

‘Elevated degree of uncertainty’

The rate rises caused another drop in banking shares across the continent, but the jitters subsided soon as the market focused its attention on the central bank’s assurances about the sensitive nature of its rate hikes.

The statement from the ECB stated that “the elevated level of uncertainty strengthens the importance of a data dependent approach to the Governing council’s policy rate decisions,” and that it will use data-dependent approaches to determine the Governing Council’s inflation outlook in light the incoming economic data, the dynamics and strength of monetary policy transmission.

“The Governing council is closely monitoring market tensions and is ready to respond if necessary to preserve price stability as well as financial stability within the euro area.”

It highlighted current market tensions as a risk to the eurozone’s economy, as pressure on banks could reduce credit provision.

Christine Lagarde, president of the ECB, stated that the projections do not include the latest developments or the effects of financial tensions on the markets.

“There is an increased level of uncertainty because of this [and] that is why we reinforce the principle data dependence [in our future policies decisions].

“We consider this a wise decision”

Credit Suisse shares ended the day 20% higher thanks to its bailout, while investors put behind them the ECB rate hikes to allow a modest recovery in bank shares.

Due to rising interest rates, the financial crisis that engulfed banks and other financial service stocks has raised serious concerns about their ability to maintain healthy balance sheets.

The rate increases in Western economies have increased the cost of servicing their debts, and put greater strain on their balance sheets.

Even in the UK, regulators insist that there is no systemic threat and that banks have much better capitalisation than before the financial crisis.

Matthew Ryan, head market strategy at Ebury Financial Services, stated that the ECB delivered a 50bp rate increase today despite the uncertainty in the markets resulting from the collapse of Silicon Valley Bank, and the slump of European banking shares.

We see this as a smart move. Sky-high core inflation, a resilient euro economy, and additional policy tightening are both reasons for extra tightening. The larger increase also sends a signal of confidence in Europe’s banking sector.

“We believe that a 25bp rate hike may have raised questions about the credibility of the ECB, considering the thorough hawkishness in the bank’s forward guidance.”