The European Central Bank raised interest rates by 50 basis points today as promised, ignoring financial market chaos and calls by investors to dial back policy tightening at least until sentiment stabilises.
The ECB has been raising rates at its fastest pace on record to curb inflation.
But a rout in global markets since the collapse of Silicon Valley Bank in the US last week had threatened to upend those plans at the last moment.
In line with its often-repeated guidance, ECB lifted its deposit rate to 3%, the highest level since late 2008, as inflation is seen overshooting its 2% target through 2025.
But it offered no commitments for the future, despite previous calls by a long list of policymakers for more big moves in the fight against inflation.
"The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council's policy rate decisions," the ECB said.
After days of turmoil in markets, financial investors this morning had seen a 50% chance of a smaller, 25 basis point move by the ECB.
They had also dialled down expectations for future moves, forecasting the peak rate at 3.25%, below the 4.1% priced last week.
Euro zone bank shares have been in freefall this week, spooked first by SVB's collapse, then a plunge in the value of Credit Suisse, a lender that has long been dogged by problems.
But the Swiss National Bank threw Credit Suisse a $54 billion lifeline overnight, a big enough show of force to send its shares back up around 20% and lift other bank stocks.
The key worry for the ECB is that monetary policy works via the banking system, and a full blown financial crisis would make its policy ineffective.
That left the ECB in a dilemma, pitting its inflation-fighting mandate against the need to maintain financial stability in the face of overwhelmingly imported turmoil.
Inflation, the bank's primary responsibility, is far higher than in previous crises and the ECB's new projections, published today, put price growth above its 2% target through 2025, an overriding concern for many ECB governors.
Inflation is seen averaging 5.3% this year, 2.9% in 2024 and 2.1% in 2025, the ECB said, adding that these projections were finalised before the current turmoil.
"The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area," the ECB said.
While systemic banking crises generally morph into deep recessions, the euro zone's financial system is in its best shape in years, with capital, liquidity and profits all at healthy levels.
Some economists also argued that the ECB has plenty of instruments to fight market stress, and so had not needed to sacrifice the rate move to keep financial assets buoyant.
After today's increases, the rate on the ECB's weekly cash auctions will rise to 3.5%, while overnight loans from the central bank will now cost 3.75%.
ECB cuts inflation projections, lifts growth outlook
The European Central Bank cut its inflation projections today but figures still point to price growth above its 2% target for years to come, suggesting a prolonged period of tight monetary policy.
Adding to the inflation worries, the ECB also raised its forecasts for underlying prices, or excluding volatile food and fuel costs, indicating that price growth is likely to be sticky, partly driven by relatively quick nominal wage growth.
Wages are still growing slower than inflation but recent wage settlements in the 5% to 6% range are inconsistent with 2% price growth, so the ECB will need to see a big moderation in wage demands next year.
The bank also lifted its growth projection for this year after the bloc avoided a winter recession, a boon for employment but also a problem for inflation as continued economic expansion amid a tight labour market could keep pushing wage costs higher.
The ECB today predicted GPD growth of 1% for 2023, up from its prediction of 0.5% in December. It has pencilled in growth of 1.6% for 2024, lower than its earlier forecast of 1.9% and growth of 1.6% for 2025, down from its previous forecast of 1.8%.
Meanwhile, inflation for this year is predicted to come in at 5.3%, lower than its earlier forecast of 6.3%. Inflation is then predicted to fall to 2.9% in 2024 and further fall to 2.1% in 2025.
The ECB targets inflation at 2%.
Meanwhile, Minister for Finance Michael McGrath said his department and the NTMA are monitoring the impact of the global volatility on the Irish banking sector
He said: "We recognise, of course, that the international financial system is highly integrated but that said, the Irish banks are in a much, much stronger place than where they were over a decade ago in terms of their capital levels.
"The system regulation is much stronger, the funding mix, the level of deposits that they have, the diversification of their loan portfolio, for example, so they are in a much, much better position.
"We do not anticipate any direct impacts but of course we are part of an integrated financial system and that is why it makes it all the more important that we continue to monitor developments closely and that is why the Financial Stability Group will continue to meet on an on-going basis and report to me as Minister."
Asked if allowances would be made in October's Budget for further mortgage interest relief given today's interest rate hike, Minister McGrath said the Government's focus now is on implementing the €1.3bn cost-of-living package over the period ahead.
Earlier, the chief economist at the Institute of International and European Affairs said Ireland would be badly affected by an international financial crisis because North America and Europe are integrated into one financial system.
Speaking on RTÉ's Morning Ireland, Dan O'Brien said the difference between now and 2008 is that Ireland also had a domestic banking crisis in 2008.
We will not have that double whammy now, should the international crisis run out of control, he said.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
"Now our domestic banking sector has become old fashioned and boring again, so it's much less risky. So all of those big loans to developers, they're all gone. That caused a domestic financial crisis for 2008. We don't have that worry now."
Bank of Ireland said today that its mortgage rates will increase for all tracker mortgage customers by 0.5% from April 5 after today's interest rate decision from the European Central Bank.
AIB, Permanent TSB and Pepper also said their tracker mortgages would increase after today's ECB rate hike.
'Banks can't have it both ways'
Taoiseach Leo Varadkar has called on banks to increase savings rates in response to the latest interest rate hike by the European Central Bank.
Mr Varadkar said the 0.5% rise by the ECB was not unexpected, but acknowledged it was unwelcome for mortgage holders in Ireland.
The Taoiseach said the Government still did not believe it was appropriate to reintroduce a tax relief measure on mortgage interest to assist those facing rising monthly payments.
"It wasn't a surprise that the European Central Bank was going to put interest rates up again," he told reporters in Washington DC.
"It is independent, it makes its decisions without approval from EU governments. I do understand why they're doing it. We shouldn't forget that the reason why the ECB is putting up interest rates is to bring inflation down and get inflation under control, and that will benefit everyone.
"But, obviously, I'm very conscious that for mortgage holders, and for other lenders, they're going to see a further increase in repayments and that's unwelcome. We have no plans at the moment to reintroduce mortgage interest relief. But one thing I would say, certainly to the banks, is that they can't have it both ways."
He said banks should not be increasing mortgage rates if they were not also going to increase saving rates.