Interest rates rise in doubt as fear of another global crisis rattles central banks | Interest rate

In 2006, the US central bank carried out a series of interest rate hikes that took its key rate from 1% to 5.25%. The plan was to cool a booming economy, but ended two years later with the Great Financial Crash.

Earlier this month, the Federal Reserve was expected to go ahead with a 0.25 percentage point hike from its current range of 4.5% to 4.75%, this time to stifle inflation. generated by the Covid-19 pandemic and the war in Ukraine.

Last week, that increase was called into question. So did the Bank of England’s expected interest rate hike on Thursday, which many in the city thought was an absolute certainty.

Analysts have changed their interest rate forecasts after the collapse of Silicon Valley Bank in the US, the sale of SVB’s London branch to HSBC for £1 and the rescue of Credit Suisse after being thrown a buoy $54bn (£44bn) bailout by the Swiss. Central bank.

Each bank has pursued its own risky strategy, allowing regulators to say their problems are one-off. But the concern is that many other banks and financial firms have made similar bets and their problems have yet to surface. There could be hundreds of banks relying on cheap funding where problems start to appear.

Paul Dales, chief economist at consultancy Capital Economics, said concerns about the health of the global banking system had risen rapidly on the agenda in recent days and could force the nine-member Monetary Policy Committee (MPC ) of the Bank of England to withdraw. .

“There is almost 50:50 between the pause or end of its series of interest rate hikes by the MPC at the March 23 meeting and the 25 basis point rate hike from 4% to 4.25%,” he said.

“A lot will depend on what happens in the global banking system by next Thursday. If the situation does not deteriorate further, we believe there will be a rise of 0.25 percentage points.

Martin Beck, chief economic adviser at the EY Item Club, said there was a strong case for easing interest rates ahead of the bank bailout.

“Even in the absence of high-profile problems in the US banking sector, the case for another rate hike by the MPC at its March meeting had weakened,” he said.

“Unexpected declines in services inflation, moderating wage growth in the private sector, lower energy prices and reassuring survey data mean that the risk of high inflation proving persistent going down,” he said, adding that “rates in the UK have risen enough.”

Some MPC members will likely focus on further momentum in the economy that shows it is more robust than expected. Most forecasters have updated Britain’s economic progress, with independent Treasury forecaster the Office for Budget Responsibility saying on Wednesday that a previously predicted recession will no longer occur this year.

One of the reasons given was Jeremy Hunt’s budget, which injected a little more money into the economy than expected, although most of the extra money will be spent next year and the year after.

MPC members Swati Dhingra and Silvana Tenreyro took the opposite view, saying in a series of speeches that 10 consecutive rate hikes since December 2021 should be allowed to translate into higher mortgage and commercial lending rates. raised before others are considered.

In a recent speech, Dhingra said: “This risks cutting production unnecessarily at a time when the economy is weak and adding to the pain of households when budgets are already squeezed by energy and housing costs. “.

Dales said it was significant that the MPC changed its language in February on the rate outlook, providing support for those who believe they have peaked in the UK.

“After raising interest rates in early February from 3.75% to 4%, the MPC changed its forward guidance by indicating that further increases in the bank rate may be needed to [saying that] if there were to be more evidence of more persistent pressures, further monetary policy tightening would be required,” he said.

It’s a way of saying that borrowing costs can stay where they are unless there’s a good reason to increase them. With the specter of 2008 lurking, inaction could be a positive move.

theguardian Gt

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