The European Central Bank is focusing on reducing inflation rather than on the financial stability of the banking sector, managers said as the central bank delivered a 50-basis-point rate hike on Thursday.
The ECB increased the main interest rate to 3.5% from 3%. The ECB had already said in February — when it raised rates by 50 basis points — that it intended to implement a further 50-basis-point rate hike in March.
The rate decision was based on the bank's projection that "inflation will remain too high for too long," Christine Lagarde, president of the ECB, said during a press conference on Thursday.
Inflation is set to reach 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025, according to ECB forecasts. The ECB's governing council sets policy to meet a 2% inflation target.
Ms. Lagarde also said the ECB is monitoring market tensions closely and that it is prepared to step in to provide liquidity support to the banking sector in the eurozone.
Commenting on the decision, Gabriele Foa, co-portfolio manager at Algebris Investments, said in an emailed comment that the ECB's statement was more "dovish" than expected.
"The central bank is not committing to more hikes, and now favors a meeting-by-meeting approach in light of recent volatility. Moreover, the ECB added a sentence on the soundness of the European banking sector, stressing the robust liquidity support in place at the ECB should stress emerge in the financial system," he added.
Mr. Foa said the bank's priority remains the inflation fight, but this can shift quickly if financial stability concerns were to emerge.
"Overall, we think rates should gradually move higher from current levels, as we expect the situation in the banking sector to remain contained," he added.
Seema Shah, global chief strategist at Principal Asset Management, said in a separate emailed comment that Thursday's rate increase implies that, for the ECB at least, inflation concerns are still greater than financial stability concerns.
However, she said that "reassurances that the ECB toolkit is fully equipped to provide liquidity support will need to be sufficiently credible and convincing."