By Joice Alves
LONDON (Reuters) -Euro zone bank shares hit two-month lows on Thursday after the European Central Bank raised rates by 50 basis points, even though some investors had thought the current turmoil in financial markets would have deterred it from delivering another hefty rate hike.
The ECB raised its benchmark interest rate by half a percentage point to 3.50%, as expected by a Reuters poll.
An index of euro zone banks fell by as much as 1.2% to its lowest since January 2 in the minutes after the decision. It was last down 0.7%, recovering some ground as the central bank lifted the growth outlook for the euro zone and said the region’s banks were in a much stronger position than they were back in 2008.
The ECB has raised interest rates since July at its fastest pace on record to curb inflation. It had effectively promised another 50 bps increase for Thursday and signalled further moves in the months ahead.
But crowding out inflation were concerns of a fresh financial crisis, following the collapse last week of Silicon Valley Bank and a crisis at Credit Suisse, which pushed its shares to a record low on Wednesday.
Over the past few days, money markets had started to price in the possibility of a 25-bp rise from this ECB policy meeting.
“The rising systemic risk investors have endured over the past five days does not make the ECB flinch,” said Florian Ielpo, head of macro and multi asset at Lombard Odier Asset Management in Geneva.
“Inflation remains too high to be ignored and the risk to unwind what the ECB has started is worth the resulting financial instability for now,” he added.
The euro’s reaction to the decision was fairly muted, and was last trading 0.1% higher on the day at $1.0591. On Wednesday, the single currency hit its lowest level against the U.S. dollar of $1.0516 since early January.
Germany’s 2-year bond yield rose 4 bps on the day to 2.426%, down a touch from 2.437% before the ECB decision. Yields move inversely to prices.
Euro zone government bond yields and the single currency had already rebounded on Thursday after Credit Suisse said it would borrow up to $54 billion from the Swiss central bank to shore up liquidity and restore investor confidence.
(Reporting by Joice Alves; Editing by Amanda Cooper)
