According to Lagarde, the banking disturbances could sway the ECB’s next interest rate decision

Christine Lagarde acknowledged that turmoil in the banking sector could force the European Central Bank to hold off on raising interest rates if recent market shocks hit lending to eurozone businesses and households.

The ECB president told MEPs on Monday that euro zone banks had “very limited exposure” to Credit Suisse after it was taken over by rival UBS in a weekend bailout deal that imposed losses on shareholders and €16 billion deleted francs from the risky additional level 1. -1, debt.

“We are not talking about billions [of exposure to Credit Suisse] we’re talking about millions here,” Lagarde said, adding that the eurozone’s banking system was “strong in terms of its aggregate capital and liquidity position.”

But Lagarde warned that the turmoil could exacerbate a recent slump in credit supply.

“We are already seeing a tightening of financial conditions,” Lagarde said. “This could be reinforced by the tensions in the banking system and we need to take that into account as part of the data we look at as part of our next monetary policy decision.”

All euro area lending provided by the bloc’s banks contractual by 61 billion euros between January and February, which is the biggest monthly decrease since 2013.

The ECB announced in January that its quarterly survey of lenders showed that since the region’s 2011 sovereign debt crisis, lending conditions for business loans have been tightened to the greatest extent. The demand for mortgage loans fell at the fastest rate on record.

The tensions of the past two weeks were “not trivial”, Lagarde said, adding that the collapse of US Silicon Valley Bank and the Credit Suisse crisis “would not be without consequences”. HE warned banks should prepare for a “potentially less favorable environment” due to lower growth, rising funding costs and higher defaults.

Last week, the ECB raised interest rates by half a percentage point and raised its deposit rate to 3 percent to cope with inflation that is more than four times the 2 percent target.

The decision comes despite calls for a pause to see how the mess in the banking system pans out. Markets are pricing in a high probability that last week’s interest rate hike will be followed by a break at the ECB’s next policy meeting on May 4.

The American Federal Reserve and the Bank of England will announce their interest rate decisions at the end of the week.

“There may come a point where central banks have no choice but to put inflation concerns on the back burner and cut interest rates to bolster confidence,” said Vicky Redwood, a former Bank of England official and consultant at research group Capital Economics.

However, Lagarde repeated that there was “no trade-off” between fighting inflation and maintaining financial stability. He said the ECB was ready to respond as necessary to preserve price and financial stability in the euro area. It oversees the markets and its toolkit is “fully equipped to provide liquidity support to the euro area financial system when needed”.

He also said euro zone lenders were “well supervised”, with more than 2,200 banks in Europe subject to Basel III rules, which require them to maintain minimum levels of liquid assets. Fewer banks in the U.S. must comply with the globally accepted Basel standards, and only the largest lenders must comply.