Good day. The European Central Bank on Thursday lifted interest rates by a half-percentage point instead of opting for a smaller increase amid a roil in markets over worries about the health of Swiss lender Credit Suisse Group AG and two U.S. bank collapses. While the move showed the ECB still sees tackling inflation as its priority, President Christine Lagarde signaled the central bank would approach further rate increases cautiously and stressed it is ready to provide fresh liquidity to banks. Additionally, she said policy makers will make future rate decisions based on coming economic data, rather than announce plans for rate increases months in advance. “It’s not business as usual,” she said. Also on Thursday, the Wall Street Journal reported the biggest U.S. banks rallied around a plan for a $30 billion infusion into First Republic Bank, to protect the entire banking system from panic by turning the bank into a firewall. After the failures of Silicon Valley Bank and Signature Bank, fears had grown that First Republic could be next. Meanwhile, emergency Fed lending jumped in the week ended Wednesday, to about $300 billion in the wake of the bank failures.

Now on to today’s news and analysis.

The European Central Bank raised interest rates by a half-percentage point while promising emergency support for eurozone banks if needed, showing the policy makers’ balancing act as they seek to combat high inflation without aggravating strains in the financial system.

The ECB said in a statement that it would increase its key rate to 3%, following consecutive half-point rate increases in February and December. The 50 basis-point rise surprised analysts who had expected a smaller uptick given the tense market following the collapse of Silicon Valley Bank.

Emergency lending by the Federal Reserve jumped to about $300 billion in the past week after two bank failures triggered turmoil in financial markets and the central bank said it would make additional funding available to financial institutions.

Most of the borrowing came from the Fed’s so-called discount window, an emergency lending facility, and from loans to “bridge banks,” the federal entities that took over Silicon Valley Bank and Signature Bank after their failures.

Borrowing at the Fed’s discount window rose by $148.3 billion, to $152.9 billion as of March 15. The emergency facility is designed to help banks meet short-term funding needs, and banks have shied away from using it in recent years.

The new emergency Bank Term Funding Program lent out an additional $11.9 billion. That program was created over the weekend to offer loans of up to one year to banks that pledge U.S. Treasury securities, mortgage-backed securities and other collateral.

—Gabriel T. Rubin

• First Republic Execs Sold $12 Million in Stock in Months Before Crash
• Credit Suisse Stock Price Jumps as Bank Secures $50 Billion Lifeline
• Janet Yellen Says Banking System Is Healthy After SVB Collapse
• Silicon Valley Bank’s Distress Wasn’t Reflected in Credit Ratings
• SVB’s Collapse Hits the Chinese Startups It Once Wooed
• What’s Going on With First Republic Bank?
• Why Is Credit Suisse in Trouble? The Banking Turmoil Explained
• The Banking Crisis: A Timeline of SVB’s Collapse and Other Key Events

The Federal Reserve believes it can hold the economy to 1.7 million job cuts as it cranks up interest rates to tame inflation. But can it? Some lawmakers had doubts even before the Silicon Valley Bank-triggered crisis.

And Johns Hopkins University economics professor Laurence Ball says he thinks the Fed’s jobless estimate—published in December—is based on “the vision of optimists.”

“I fear that if the Fed really wants to get inflation down to 2% it will have to throw more people out of work,” Mr. Ball said. “Inflation either has to stay high or unemployment has to go up.” Read more.

The Bank of Russia left its key interest rate at 7.5% for the fourth straight policy meeting on Friday, and repeated its warning that it might tighten policy if the war in Ukraine threatens to drive inflation higher. The lengthening pause follows a series of rate cuts that more than reversed a doubling of the key rate in the immediate aftermath of Russia's invasion of Ukraine more than a year ago. (Dow Jones Newswires)

China’s central bank said Friday that it will lower the amount of deposits banks have to set aside, underscoring Beijing’s efforts to kick-start economic growth this year. The People’s Bank of China said it would cut banks’ reserve-requirement ratio by 0.25 percentage point, which will bring the weighted average RRR level for the whole banking system to 7.6%. The change will take effect March 27, it said. (DJN)

• China’s Communist Party Overhaul Deepens Control Over Finance, Technology
• China Cultivates Thousands of ‘Little Giants’ in Aerospace, Telecom
• Chinese Developer Evergrande Nears Landmark Restructuring Deal
   

9:15 a.m.: U.S. industrial production for February
10 a.m.: The Conference Board Leading Economic Index for the U.S. for February; University of Michigan preliminary consumer survey for March

8:30 a.m.: Canada consumer price index for February
10 a.m.: U.S. existing home sales for February

The Federal Reserve could follow the European Central Bank’s lead by raising interest rates at its meeting next week despite the turmoil in the banking sector, Evercore ISI analysts write in a note. The ECB on Thursday lifted rates by 50 basis points, as previously guided, even as pressures in the banking sector had sparked speculation of a 25 basis point move. That “makes us a bit more confident in our base case call that the Fed will go ahead with 25bp next week,” the analysts write. “But events are highly dynamic, the Fed does not have to make that call now, and if banking instability intensifies into the Fed meeting it would still decide to take a one-meeting time-out.”

—Renae Dyer

The European Central Bank’s 50 basis-point interest-rate rise on Thursday may be its last hike for the foreseeable future, Katharine Neiss, chief European economist at PGIM Fixed Income, writes in a note. The ECB made no mention of any acceleration of the pace of tightening beyond the second quarter of this year, and the bank’s accompanying statement also contains a notable shift toward a more dovish tone by emphasizing data-dependence and stepping away from signaling successive rate increases to come, Ms. Neiss writes. “This is an important change that opens the door to the possibility this hike may well be the last,” she writes. The ECB also provided reassurance on liquidity tools given the recent market turmoil, she adds.

—Edward Frankl

We are headed at an accelerating pace toward a European-style banking system dominated by a handful of very large, effectively government-guaranteed banks, Kevin R. Greene and John Michaelson write, adding this would amount to a fundamental shift in the U.S. banking system that would undermine its support for small and midsize businesses and local communities.

Mr. Greene is chairman and CEO of Tassat Group Inc. Mr. Michaelson is chief investment officer of Michaelson Capital and a director of Tassat.

• U.S. home building picked up in February, breaking a series of declines with multifamily projects leading the way, the Commerce Department reported. Housing starts, tracked at a seasonally adjusted annual rate, rose 9.8% from January’s revised level to an annual rate of 1.45 million, the biggest month-over-month gain since March 2021. The increase snapped a streak of monthly declines that began in September. (Barron’s)
• Prices of imported goods to the U.S. declined again in February and posted their first annual drop since December 2020. Import prices fell 0.1% in February on month after declining by a revised 0.4% in January, according to Labor Department data. The decline was led by a 4.9% decline in fuel prices, particularly a 55.6% drop in natural gas prices. Excluding fuels, import prices rose 0.4% on month. Prices fell 1.1% in February from a year earlier, swinging from the 0.9% on-year increase in January. (Dow Jones Newswires)
• Manufacturing activity in the Philadelphia area contracted in March for a seventh consecutive month, driven by sharply weakening demand for goods, data from a survey from the Federal Reserve Bank of Philadelphia showed. The index for current general activity of the bank’s Business Outlook Survey edged up to minus 23.2 in March from minus 24.3 in February, recovering slightly from the lowest reading since the Covid-19 pandemic shock. (DJN)
• Labor costs in the eurozone increased at its fastest pace on record in the fourth quarter as wage growth gathered pace, adding to the European Central Bank's concerns in its fight against inflation. Hourly labor costs in the eurozone rose by 5.7% from October to December compared with the same quarter a year earlier, accelerating from an upwardly revised 3.7% on-year increase registered in the third quarter, data from the European Union Statistics Agency showed. (DJN)
• Singapore's non-oil domestic exports fell in February for a fifth straight month, with shipments of electronics and non-electronics declining in more than half of its top 10 markets. Non-oil domestic exports from the country contracted 15.6% in February compared with the same period a year earlier, Enterprise Singapore said. That was slightly better than the median estimate for a 15.95% decrease in a Wall Street Journal poll of eight economists. (DJN)

This newsletter is compiled by James Christie in San Francisco.

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