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ECB Hikes Interest Rates Amid Banking Crisis

The European Central Bank (ECB) raised three of its policy rates by 50 bps for a sixth straight time, raising its eurozone borrowing costs benchmark from 2.5% to 3.0%, its highest since late 2008, while inflation is seen to have exceeded the 2% target for the period to 2025.

The banks decision comes amid a series of challenges for the banking sector, including the recent failure of Silicon Valley Bank in the US, and a $54bn rescue for Credit Suisse from the Swiss National Bank.

Central banks for 20 countries sharing the euro are locked in a battle to return inflation to its 2% target for the currency group, down from 8.5% last month. The ECU staff now expects inflation to average 5.3% in 2023, 2.9% in 2024, and 2.1% in 2025. Inflation without energy or food continued rising in February, with ECB staff expecting that to average 4.6% in 2023, higher than expected in the December forecast.

The central bank said that its current macroeconomic forecast was completed at the beginning of March, ahead of the recent rise of tensions on financial markets. As a result, those tensions have created further uncertainty about its headline estimates for inflation and growth.

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