Investors liked the message the ECB would take a data-driven approach on raising interest rates further
London (AFP) - Stocks surged higher Thursday after the European Central Bank went ahead with a big interest rate hike despite fears of a banking crisis but took a somewhat “dovish” tone for the future.
Investors had hoped the European Central Bank would reduce the amount of its rate hike, or even pause it over fears about the health of Credit Suisse and the wider banking system following the implosions of two US lenders.
But the central bank raised its main rates by half a percentage point, as it had previously pledged to do.
It did, however, drop a reference – used in previous statements – to the need to raise rates “significantly” going forward and ECB chief Christine Lagarde refused to commit to further rate hikes although she said more were needed.
Stock markets seesawed following the ECB’s announcement.
European shares, which had risen earlier on relief that troubled banking giant Credit Suisse had secured a financial lifeline, initially fell but then quickly rebounded.
Wall Street opened lower, only to rise later in the morning.
“Investors have viewed this as a ‘dovish hike’ from the ECB, as the bank indicates that it is shifting to an entirely data-dependent approach,” said from Matthew Ryan, head of market strategy at global financial services firm Ebury.
Dovish in monetary policy means favouring lower interest rates to maximise growth and employment, rather than pursuing a “hawkish” policy focused on raising interest rates to reduce inflation.
The half-percentage-point “hike sends a clear signal of confidence in the strength of the European banking sector,” Ryan added.
Frankfurt closed up 1.6 percent and Paris advanced two percent. London rose 0.9 percent.
The Dow was up 0.6 percent in midday trading, while the broader S&P 500 index rose 1.2 percent and the tech-heavy Nasdaq Composite climbed 1.8 percent.
The euro rose against the dollar.
A day after hitting a record low, Credit Suisse rallied after it announced that it would borrow up to $54 billion from the country’s central bank.
Its shares soared more than 30 percent at the open Thursday. They finished the day up just over 19 percent.
“We’re not seeing too many jitters in the markets at this point but they can obviously materialize at any point,” said Craig Erlam at OANDA trading group.
For him, “the real test will come from how European banks trade over the hours and days ahead.”
Other European banking giants including BNP Paribas and Commerzbank were also in the green, though Societe Generale and Deutsche Bank fell.
The Dow Jones US Banks Index was up 1.3 percent, but embattled First Republic Bank was down 16 percent after Bloomberg reported management was considering options for the lender’s future including a sale.
The ECB rate hike is the first by a major central bank since markets were rocked by banking crisis fears, testing the eurozone institution’s resolve to implement another hefty increase.
There is also much debate over whether the US central bank will continue with its rate tightening campaign.
The collapse of California lender Silicon Valley Bank (SVB) has been widely linked to the sharp rise in borrowing costs over the past year.
Some commentators expect US Federal Reserve officials to lift rates once more next week but possibly hold afterwards, while there is a growing belief that it could even announce cuts before the end of the year.
But the ECB’s decision will also likely impact the thinking of Fed policymakers, said Naeem Aslam, chief investment officer at Zaye Capital Markets.
“The fact that the ECB has increased the rate by 50 basis points, the chances are now that the Fed is going to do the same as well,” he said.
- Key figures around 1630 GMT -
New York - Dow: UP 0.6 percent at 32,066 points
London - FTSE 100: UP 0.9 percent at 7,410.03 (close)
Frankfurt - DAX: UP 1.6 percent at 14,967.10 (close)
Paris - CAC 40: UP 2.0 percent at 7,025.72 (close)
EURO STOXX 50: UP 2.0 percent at 4,116.98 (close)
Tokyo - Nikkei 225: DOWN 0.8 percent at 27,010.61 (close)
Hong Kong - Hang Seng Index: DOWN 1.7 percent at 19,203.91 (close)
Shanghai - Composite: DOWN 1.1 percent at 3,226.89 (close)
Euro/dollar: UP at $1.0623 from $1.0578
Pound/dollar: UP at $1.2111 from $1.2055
Euro/pound: DOWN at 87.68 pence from 87.71 pence
Dollar/yen: UP at 133.07 yen from 133.45 yen
West Texas Intermediate: UP 0.6 percent at $68.03 per barrel
Brent North Sea crude: UP 0.8 percent at $74.28 per barrel