Despite banking turmoil, central banks keep hiking rates
Over the past few years, central banks around the world have had only one goal: to bring down inflation no matter the cost, even though the world experienced banking uncertainties.
Although the management of Silicon Valley Bank “failed badly”, US Federal Reserve chairman Jerome Powell last week attempted to reassure investors about the stability of the overall banking system by claiming that the failure of the California bank was not reflective of broader flaws in the system.
The European Central Bank also stuck to a large rate hike, even as jitters persisted in the US and Credit Suisse had to be rescued by the Swiss central bank and then bought out by its bigger rival UBS.
Fed opts for modest rate hike amid worldwide banking crisis
Last Wednesday, the Federal Reserve hiked its benchmark rate by a more modest 25 basis points as it battles stubborn inflation, but signalled a possible pause in further increases following the recent collapse of two US banks. The Federal Funds Rate is now at 4.75% to 5%, which is the highest since October 2007.
Instead, the Fed’s statement on Wednesday said: “The committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”
Fed policymakers kept the anticipated range of peak interest rates for this year, between 5% and 5.25%, unchanged from their December projections. Seven members anticipate rates above 5.25%, while one anticipates a peak as high as 6%. No one expects any decrease in rates this year.
The Fed’s projections are based on an assumption that the US unemployment rate will finish the year at 4.5%, down from 4.6% that had been forecast in December last year.
US gross domestic product (GDP) is expected to grow by just 0.4%, down from 0.5% pre-dicted earlier. Inflation is forecast to end the year at 3.6%, up from 3.5% estimated in December.
ECB says future rate hike decisions open amid banking turmoil
Christine Lagarde, the president of the European Central Bank, said future interest rate decisions remain open after turmoil in the global financial system made the economic outlook “blurrier” than just a few weeks ago.
She mentioned that the decision to keep raising rates would be made based on new data, particularly whether the bank could see indicators that high inflation is clearly moving downward. The open-ended approach is a shift from the ECB’s earlier stance of clearly indicating that more rate hikes were in the offing as it underlined its determination to reduce inflation.
Inflation shock compels Bank of England to hike again
On Thursday, the Bank of England increased interest rates for the 11th consecutive time after a surprise jump in inflation dashed speculation that it might be ready to go on pause. After reaching a 41-year high above 11% in October, most economists were anticipating that inflation would continue to decline slowly.
However, Wednesday’s statistics, which showed that inflation increased to 10.4% in February from 10.1% in January, immediately transformed the outlook for Thursday’s announcement.
As recently as Tuesday, investors were split almost 50-50 on whether the BoE would leave its benchmark rate unchanged for the first time since November 2021.
The rescue of Credit Suisse and the failure of Silicon Valley Bank, which showed how some international banks were discovering it difficult to adjust to increased borrowing costs, appeared to be supporting bets on the BoE ending its run of rate hikes.
Despite this, investors in rate futures markets are now preparing for the BoE to make up to two additional adjustments of 25 basis points by the end of September.