The ECB said there was no need for its monetary policy plans to be adjusted because of the sharp movements in several European bank shares over the past week.
“We are monitoring current market tensions closely and stand ready to respond as necessary to preserve price stability and financial stability in the euro area,” said ECB President Christine Lagarde.
The ECB lifted its deposit rate to 3 per cent, the highest level since late-2008, as inflation is expected to overshoot its 2 per cent target until at least 2025.
But it offered no commitments for the immediate future, despite previous calls by a long list of policymakers for more big moves in the fight against inflation.
What the ECB did do, however, was to drop a reference — which it has previously used — to the need to raise rates “significantly” in future.
On Thursday morning, after days of market turmoil, economists said there was a 50 per cent chance that the ECB would only raise rates by 0.25 per cent. Some also predicted rates would peak at 3.25 per cent, rather than 4.1 per cent, which was being forecast before the collapse of Silicon Valley Bank (SVB) last week.
“Despite expectations that policymakers may go slower on rate hikes given the volatility on markets and worries racking the sector, they’ve voted for a 0.5 per cent hike,” said Susannah Streeter at Hargreaves Lansdown.
“Hot inflation is still considered to be a big threat to financial stability, which is why, for now, the ECB are sticking to their plan.”
Eurozone bank shares have been in freefall this week, spooked at first by SVB's collapse and then by a plunge in the shares of Credit Suisse, a bank that has long been dogged by problems.
Credit Suisse, Switzerland's second-largest bank, saw its shares plunge as much as 30 per cent on Wednesday, after its biggest investor, Saudi National Bank, said it could not provide more financial support.
But the Swiss National Bank threw Credit Suisse a $54 billion lifeline overnight, which was enough to send its shares back up more than 20 per cent on Thursday morning.
If the ECB had done less than it said it would, that is, raise interest rates by anything less than 0.5 per cent, many analysts said that would have sent the wrong signal to the markets.
It might have also implied that Europe's banks were less stable than they actually are.
“Its business-as-usual approach could be seen as vote of confidence in the European banking sector," said Danni Hewson, head of financial analysis at AJ Bell.
"If it had changed tack some investors might have taken it as a sign central bankers were seriously concerned about the current situation."
“That said, the ECB was at pains to make clear that it was acutely aware of current tensions and indicated it was ready and able to step in if things deteriorate further," she added.
The ECB is the first major central bank to make a decision on interest rates since the SVB fallout sent a wave of turmoil through global markets last week.
Some now expect the Federal Reserve to follow suit, despite lingering liquidity concerns over some small, regional banks in the US, particularly First Republic Bank, whose shares were down 30 per cent in early trade in New York.
“The fact that the ECB has increased the rate by 50 basis points, the chances are now that the Fed is going to do the same as well,” said Naeem Aslam, chief investment officer at Zaye Capital Markets.
Meanwhile, the ECB also lowered its inflation forecasts, with inflation now predicted to reach 5.3 per cent this year and 2.9 per cent next year.
It had previously forecast 6.3 per cent for this year and 3.4 per cent for 2024.
“Underlying price pressures remain strong,” the ECB said. “Inflation, excluding energy and food, continued to increase in February.”