The European Central Bank went ahead with a planned half a percentage point rise in interest rates on Thursday despite the outbreak of financial turmoil, while signalling future increases would depend on the market panic seen in recent days dissipating.

The ECB’s decision to lift its benchmark deposit rate from 2.5 per cent to 3 per cent — in line with what it had promised last month — came ahead of crunch policy votes by rate-setters in the US and UK next week.

The meeting was seen as a test of policymakers’ appetite to keep raising rates despite the stress on banks in the wake of the failure of Silicon Valley Bank and worries over Credit Suisse.

While the ECB’s governing council stuck to the script set during its February meeting, its members ditched a previous commitment to keep “raising interest rates significantly at a steady pace” in a sign they are unsure about how much further they will be able to increase borrowing costs. That was despite acknowledging inflation remained “too high”.

Christine Lagarde, ECB president, indicated some of the council wanted to stop raising rates as soon as this week, saying three or four members were waiting for clarity on “how the situation unfolds”. The “vast majority” that kept to the plan went ahead with the rate rise to show confidence in the eurozone banking system.

Katharine Neiss, an economist at investor PGIM Fixed Income, said the change in the ECB’s guidance was “a notable shift towards a more dovish tone”, adding that it “opens the door to the possibility that this hike may well be the last — at least for the foreseeable future”.

Shares in Credit Suisse and other European banks clawed back some earlier losses on Thursday after Switzerland’s second-biggest lender said it would borrow up to SFr50bn ($54bn) from the Swiss central bank and buy back about SFr3bn of its debt in an attempt to boost liquidity and calm investors.

The Swiss central bank’s intervention lightened the mood among eurozone rate-setters on Thursday morning, with one saying it had “stopped the panic”. The ECB said eurozone banks were “resilient, with strong capital and liquidity positions”, while emphasising it had the tools to “provide liquidity support” if needed.

The central bank also cut its inflation forecasts for the next three years, while saying price pressures were still “projected to remain too high for too long”. Frederik Ducrozet, an economist at Pictet Wealth Management, said he was “not sure the ECB is done raising rates yet, but they have given themselves a lot more flexibility” to pause.

The euro traded between gains and losses against the dollar as Lagarde responded to questions from journalists. Germany’s rate-sensitive two-year borrowing costs rose 0.17 percentage points to 2.57 per cent, partly reversing recent falls.

The US Federal Reserve and the Bank of England are seen as more likely than the ECB to adopt a wait-and-see approach.

Economists said central banks were entering a new phase in their efforts to tame decades-high inflation, requiring them to balance monetary tightening with measures to avoid a financial crisis.

Krishna Guha, head of policy and central bank strategy at US investment bank Evercore ISI, said rate-setters would have to show they can “walk and chew gum at the same time — address financial stability concerns with financial stability instruments while using rates to control inflation and so avoid financial dominance”.

Lagarde, however, said there was “no trade-off” between the two as rates could be used to tackle inflation while other tools — including new ones if required — addressed any financial turmoil.

Italy’s hard-right League party run by deputy prime minister Matteo Salvini criticised the ECB decision as “detached from the real economy” and warned it risked “artificially provoking a recession in order to fight inflation with poverty”.

The European Trade Union Confederation was also unhappy, as its general secretary Esther Lynch said the ECB move was “pre-emptive and reckless at a time when banks are failing” inflation is falling and bankruptcies are rising.

The central bank lowered its quarterly inflation forecast for this year from the 6.3 per cent expected in December to 5.3 per cent and for next year from 3.4 per cent to 2.9 per cent.

Price growth in 2025 would also be slightly lower than anticipated but remain above its 2 per cent target, at 2.1 per cent. Core inflation, a measure excluding energy and food, would be higher than expected at 4.6 per cent this year, indicating more policy tightening could be required.

“If our baseline was to prevail when the uncertainty reduces, we know we still have a lot of ground to cover,” said Lagarde, while adding there was “a big caveat” because its forecasts were based on data before the recent banking turmoil.

Additional reporting by George Steer