The European Central Bank stuck with its plan to hike interest rates by half a percentage point Thursday, judging that inflation poses a bigger threat to the economy than turmoil in the banking sector. But the ECB said it was keeping a close watch on “current market tensions” and “stands ready to respond as necessary to preserve price stability and financial stability in the euro area.” The central bank has the tools if needed to respond to a liquidity crisis “but this is not what we are seeing,” ECB President Christine Lagarde told reporters. Lagarde and Vice President Luis de Guindos stressed that European banks were much more resilient than they were before the global financial crisis, with strong capital and liquidity positions, and no concentration of exposure to Credit Suisse\n \n (CS). A ‘relief’ for markets Shares in Europe’s banks rose Thursday afternoon, recovering from earlier losses that followed the ECB’s rate hike. “A sort of relief this afternoon for the markets after the ECB meeting,” said Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions. Some analysts had expected the central bank to opt for a smaller hike of 25 basis points to balance inflationary pressures against the risk of adding further stress to markets, particularly after banking stocks sold off sharply Wednesday and Credit Suisse tapped a lifeline from Switzerland’s Central Bank. But markets “remained relatively stable” after the ECB announcement, Boucher said, “which in the end did not create any surprises.” Lagarde said the decision to hike by 50 basis points was taken by a “very large majority … and in rather record time.” However, unlike after previous meetings, she did not signal further hikes to come, which suggests the central bank may now pause to take stock. The ECB’s latest move takes the benchmark rate across the 20 countries that use the euro to 3%. The central bank has now hiked rates at six consecutive meetings since July in a bid to get inflation under control. “Inflation is projected to remain too high for too long,” the ECB said Thursday, adding that core inflation — excluding volatile energy and food prices — continued to increase in February. At 8.5%, inflation in the euro area last month was far above the central bank’s 2% target. And data Wednesday showed a stronger than expected increase in industrial production across the euro area. “The ECB did today the only thing one would expect from a central bank with a price stability mandate when inflation … is more than twice the target,” said Sylvain Broyer, chief European economist at S&P Global Ratings. “Potential fragilities in the banking system should be addressed by policy instruments other than interest rates. The ECB has plenty of such instruments at hand,” he added. Bank turmoil could weigh on the economy There are growing concerns that the demise of Silicon Valley Bank last week, which has hammered bank stocks, could lead banks to adopt a more cautious approach to lending. That would weigh on economic growth and inflation, reducing the need for rate hikes. Lagarde acknowledged that “persistently elevated market tensions” could further constrict already tightening credit conditions. Loan growth to households had slowed further since the ECB’s last meeting, as higher borrowing costs crimped demand. A “weakening of bank credit would contribute to lower price pressures than currently anticipated,” she added. Based on projections made in early March before the collapse of SVB, ECB staff now see inflation averaging 5.3% in 2023, which is lower than the 6.3% they projected in December. A high level of uncertainty reinforces the importance of being guided by economic data in making policy decisions, Lagarde said. She emphasized that the ECB’s determination to fight inflation and return it to 2% remained “intact.” Salomon Fiedler, an economist at Berenberg, said that before its next meeting in May, “the ECB will need to judge by how much financial conditions tighten in response to the recent shocks — and thus how much economic momentum and inflation would slow down even without further ECB action.” The Federal Reserve and the Bank of England will need to make a similar call when they meet to set interest rates next week.