Credit Suisse shares plunged 24% on Wednesday, forcing Europe's 17th largest lender to seek 50 billion Swiss francs (€50.9 billion) in emergency loans from the Swiss central bank to "pre-emptively strengthen its liquidity". The move saw financial experts reassess forecasts of the European Central Bank's (ECB) expected rate hike on Thursday.
Experts had previously expected the ECB to raise its core interest rate by 50 basis points (or 0.5 percentage points) at its Thursday meeting to rein in Europe's high inflation rate which, at 8.5%, is more than four times the ECB's 2% target rate. But given the current financial turmoil, many are now predicting smaller rate increases, with some even forecasting no rate hike at all.
"The pressure on European banks has caused a reassessment of today's ECB meeting," Chris Turner, the Head of Foreign Exchange Strategy at ING, told l'Echo. "What was seen as a solid 50 basis point rise by the ECB has now been reduced." Markets now anticipate a 25 basis point hike.
The turmoil surrounding Credit Suisse follows the collapse last Friday of Silicon Valley Bank (SVB), America's 16th largest commercial bank. The bank had operations in numerous European countries including Denmark, Germany, Ireland, and Sweden.
A justified reassessment?
Turner's predictions were echoed by numerous other financial experts, many of whom issued dire warnings about the dangers of the ECB raising interest rates at a time of severe economic crisis.
"Current developments qualify as 'extreme' and justify a reassessment of our ECB call," Barclays economist Silvia Ardagna told Reuters. "We assign a 20% probability to no hike, a 60% probability to a 25 basis point hike and a 20% probability to a 50 basis point hike."
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Ardagna's estimates were broadly similar to those of The Guardian, which reported that current money market pricing suggested that investors now predict a less than 20% chance of the ECB raising rates by 50 basis points at its Thursday meeting, down from 90% on Wednesday.
The ECB has already hiked interest rates five times in the past year, most recently in February, when its key interest rate was raised 50 basis points to 2.5%. The bank pledged to "stay the course in raising interest rates significantly at a steady pace". At the time, this was taken as an intention to raise interest rates another 50 basis points in March, though this has now been cast into doubt.