The European Central Bank’s governing council is widely expected to raise interest rates by another half a percentage point today after its meeting in Frankfurt.
The ECB’s move will come as the financial world continues to be rocked by turmoil in the banking sector in Europe and the United States.
Today’s widely expected half point increase in interest rates would bring the euro area base rate to 3%.
It has been widely flagged.
Despite this, there has been some market speculation the ECB may not follow through by as much as half a point or even at all, given the volatility in financial markets following the failure of Silicon Valley Bank in the US and the collapse in the share price of Credit Suisse.
But inflation remains high across the euro area with many economies, including Ireland, seeing headline rates go back up in February.
Meanwhile, Swiss financial authorities stepped in last night to offer support to troubled bank Credit Suisse.
It also asserted there were no indications of a direct risk of contagion to Swiss banks from turmoil in the US banking sector.
Chief Economist at the Institute of International and European Affairs said he thinks it is unlikely that the ECB will not increase interest rates today.
Speaking on RTÉ’s Morning Ireland, Dan O’Brien said the ECB has already signalled its intention to increase rates and failing to do so would send a signal to financial markets that “it is very scared” and it does not want to do that.
However, he added, because there is severe turbulence in banking and financial markets, it is possible that the ECB will increase rates by a quarter, and not a half, percent.
Mr O’Brien said Ireland would be badly affected by an international financial crisis because North America and Europe are integrated into one financial system.
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.
“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.”
Mr O’Brien said the ECB is facing an extremely difficult balancing act – increasing interest rates runs the risk of creating a bigger financial crisis and a recession, while failure to do so risks letting inflation get out of control.
There is no clear path out of this, it is a “very, very difficult, fragile situation,” he added.
Mr O’Brien said he hopes that inflation is close to peaking and will come down over the course of the year.
However, he warned, inflation has been more persistent than most people thought it would be.
He added that what everyone wants to avoid is a serious financial situation that would push economies into recession.