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The world’s central banks are juggling whether to raise interest rates further in order to reduce inflation, and with the banking sector in turmoil, the stakes are especially high.
Central bank interest rates long ran close to zero, but they have now been climbing for months in a bid to rein in rising prices.
Silicon Valley Bank in the United States, which collapsed last week, did not adapt quickly enough.
It booked a US$1.8 billion loss on bonds whose prices were brought down by the higher rates.
A second US lender, Signature Bank, imploded over the weekend while a third, First Republic Bank, was rescued by a coalition of its peers through US$30 billion in deposits.
Concern has spread to other banks considered fragile – Switzerland’s central bank intervened to protect Credit Suisse with a US$54 billion loan, though its shares tumbled more than 11 percent on Friday.
Central banks must now decide if they can risk worsening the crisis by taking a hard line on inflation.
What has the ECB done?
Despite the turbulence over the past week, the European Central Bank (ECB) on Thursday stuck to a planned half percentage point interest rate increase.
The move reflected its “determination to curb persistent inflationary pressures”, said Eiko Sievert of ratings agency Scope.
But he said the pace of rate increases should “slow significantly this year”.
President of the ECB Christine Lagarde performed a balancing act on Thursday.
In the face of calls to slow rate hikes amid the banking turmoil, she insisted there was “no tradeoff” between price and financial stability. -AFP
Lagarde said the central bank for the 20 countries using the euro was ready to intervene “as necessary” to protect the financial system.”No one else is better positioned to judge the actual state of eurozone banks and financial markets than the ECB,” said analyst Lorenzo Codogno.
It “would have sent the wrong signal” if the central bank had changed tack at the last minute, Codogno said.
The decision keeps two options open, according to Frederik Ducrozet, an economist at Pictet Wealth Management.
“If the panic eases, the ECB is likely to resume tightening before long”, he said.
But if the banking sector crisis persists, “the ECB would not hesitate to intervene, quickly and boldly, if financial stability were to be threatened,” he said.
Online Reporter