Market turmoil tests ECB rate hike appetite

LONDON - European Central Bank governors will meet on Thursday, with fears over a widening banking crisis testing their resolve to raise interest rates again by a hefty half percentage point.

Investors say the ECB should reconsider its plans following the collapse of Silicon Valley Bank and Signature, the sector's biggest failures since the 2008 financial crisis.

Fears of contagion have spread to Europe, with stock markets tumbling and Credit Suisse shares hitting a record low on Wednesday, while other lenders also saw dramatic drops.

"The sell-off may have implications for the ECB's policy decision," said Capital Economics analyst Andrew Kenningham. 

The banking crisis poses a conundrum for central bankers seeking to tame inflation while preventing an exacerbation of the market turmoil.

SVB's demise was precipitated by the US Federal Reserve's own rate-hike campaign, which brought down the value of bonds with lower returns that the California bank held, causing it to lose $1.8 billion.

"It seems investors have been rattled by worries that the ECB may still opt for a big rate increase, despite the problems hard and fast monetary policy tightening has had on bond prices," said Susannah Streeter, head of money and markets at wealth management firm Hargreaves Lansdown.

"The worry is that banks sitting on large unrealised losses in their bond portfolios might not have sufficient buffers if there is a fast withdrawal of deposits," she said.

But Kenningham said the ECB will likely press on with its pre-announced plan to raise the deposit rate from 2.5 to 3.0 percent.

Others, however, have revised their expectations for Thursday, with ING analysts noting that "what was seen as a solid 50 basis points hike from the ECB has today been cut to a 35 basis points hike".