ECB should change rates plan, says Bini Smaghi

BLOOMBERG

The European Central Bank (ECB) should either delay or pare back this week’s planned interest-rate increase to avoid a policy error reminiscent of 2011, former Executive Board member Lorenzo Bini Smaghi told Boersen-Zeitung.
The German newspaper published an interview with the Italian, the eve of a decision for which a half-point hike has been described by President Christine Lagarde as “very, very likely.”
Her remarks, however, came before the collapse of Silicon Valley Bank, which has rattled global markets and prompted investors to dial back bets on monetary tightening on concerns over financial stability.
“Postponing for one month or doing only 25 points would not be a problem if well explained,” Bini Smaghi told Boersen-Zeitung.
“The financial contagion is equivalent to some form of tightening of monetary conditions. Sticking to the 50-point increase, as if nothing happened, means implementing a tougher stance than previously thought.”
The former central banker, who is now chairman of Societe Generale SA, made the parallel with 12 years ago, when the ECB raised borrowing costs only to undo the move as sovereign-debt turmoil engulfed the euro region.
“The ECB should avoid repeating the 2011 mistake, when it continued hiking rates without taking into account the growing contagion from the Greek debt restructuring,” Bini Smaghi said, according to the newspaper. “This precipitated the crisis and led to a policy reversal after a few months.”
Bini Smaghi spoke on a day of financial jitters in Europe as banking stocks slumped amid worries about the stability of Credit Suisse Group AG. The cost of insuring the Swiss bank’s bonds against default in the near-term has approached a level that typically signals serious investor concerns.
Given the backdrop of turmoil after the failure of SVB, Deutsche Bank AG economists said that the ECB will probably ditch its guidance and hike by only 25 basis points.