ECB continues with interest rate hike of half a point despite increasing bank stress

The ECB’s decision provides a first glimpse of how major central banks, including the Federal Reserve, might respond to recent signs of market trouble that began last week with the collapse of two major US banks. Both the Fed and the Bank of England will hold their policy meetings next week.

Investors have been reviewing key and government bond rates over the past week, pointing to a rapid shift in expectations about the direction of monetary policy going forward.

In a nod to the market turmoil, the ECB said it is “closely monitoring current market tensions and stands ready to respond if necessary”. It said the eurozone banking sector is resilient, with strong capital and liquidity positions. The ECB’s policy toolkit is fully equipped to provide liquidity support to the eurozone financial system when needed.

The decision to proceed with the pre-announced plans suggests that the ECB still sees reducing the high and persistent inflation in the eurozone as its priority.

Still, investors are betting that the recent wave of market turmoil could be a turning point for central banks, highlighting the risks of their most aggressive fight against inflation in decades.

Write to Tom Fairless at tom.fairless@wsj.com