European Banks Face Rising Borrowing Costs

Rising market rates are posing a dilemma for European Central Bank officials trying to keep their ultra-expansive monetary policy in place.

Overnight borrowing costs for banks have surged above the ECB’s benchmark rate even as policy makers argue that it’s not yet time to exit emergency stimulus. When officials meet in Frankfurt on Feb. 6 they’ll have to assess whether the tighter financing conditions show a resurgence of tensions that warrant a policy response or simply increased confidence in the region’s economic recovery.

ECB President Mario Draghi told business and political leaders in Davos, Switzerland, on Jan. 25 that the central bank will act if it sees an unwarranted rise in money-market rates, which can influence loan costs for companies and households. While banks including Royal Bank of Canada and Commerzbank AG are predicting the ECB will cut its official rates by March, ECB Governing Council member Klaas Knot signaled that assumption is premature.

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