The demise of Silicon Valley Bank (SVB) in the United States has caused movement in financial markets around the world – and in particular raised the question of whether central banks will now be more cautious about further interest rate hikes.
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In any case, the investment bank Goldman Sachs expects an impact on the course of the US Federal Reserve: "In view of the recent stress in the banking system, we no longer expect the Fed to raise interest rates at its meeting on March 22," write Goldman Sachs chief economist Jan Hatzius and his colleagues. But this is controversial.
The European Central Bank (ECB) could now also have voices calling for a more cautious course. Nevertheless, ECB observers expect the central bank to raise key interest rates by another 0.5 percentage points this Thursday at its March interest rate meeting, as announced. Finally, inflation in the euro area is proving to be quite persistent. The reduction of the trillion-dollar bond holdings, which has already begun, is also likely to be accelerated.
It will be interesting to see what the ECB will say about its further course and possible risks.
Inflationary pressures remain high
In view of the still high inflationary pressure, the ECB will hardly slow down the pace of its interest rate hikes, said Marco Wagner, ECB observer at Commerzbank: "Of course, the ECB Governing Council members will also talk about Silicon Valley Bank – but this is unlikely to dissuade them from the interest rate hike already announced."
In response to the news from America, however, the financial markets have lowered expectations of how far the ECB will go up with its key interest rates by the summer: "The markets expect only a level of 3.8 percent by June," said Karsten Junius, economist at Bank J. Safra Sarasin: "This is almost a whole interest rate hike less than last week."
However, he expects the ECB to stick to an interest rate hike of 0.5 percentage points this week. "After the high wage agreement at Swiss Post, this is even more justified than before," said Junius: "Unfortunately, wage pressure is increasing, especially in Germany – the ECB must react."
At the moment, it can indeed be observed that market participants in America are adjusting their expectations about the Fed's monetary policy under the impression of current developments and anticipating an earlier end to interest rate hikes, said Michael Holstein, chief economist at DZ Bank. However, he says: "The Fed is only likely to react to interest rate policy if the current problems of a few American institutions spread to other companies." Then European monetary policy could also be called upon: "However, we do not currently expect such a development."
In any case, the ECB is facing extremely difficult conflicts of objectives, said Fritzi Köhler-Geib, Chief Economist of the promotional bank KfW: "On the one hand, to tighten quickly and clearly enough to bring inflation back to the 2 percent target, and on the other hand, to avoid turbulence on the bond markets and in the economy." Hitting the appropriate dosage is "more of an art than a science," said Köhler-Geib.
Financial crisis unit meets
The members of the Governing Council themselves are required not to comment on the upcoming decision in the week before an interest rate meeting, as is the case now, and have also held back. In recent weeks, the "hawks", the advocates of a tighter monetary policy, have spoken out with demands for significant interest rate hikes.
At the end of last week, this had changed somewhat; Italy's central bank governor Ignazio Visco had emphasized that uncertainty remained high: "I therefore do not appreciate statements by my colleagues about future and sustained interest rate hikes."
In Frankfurt, the financial supervisory authority Bafin ordered a moratorium on the German branch of the SVB on Monday to secure the assets for the creditors. "The plight of Silicon Valley Bank Germany Branch does not pose a threat to financial stability," the supervisors stressed.
Nevertheless, the Bundesbank's Financial Crisis Unit, which was set up after the 2008 financial crisis, discussed possible effects. The Bundesbank is "in close coordination with the Federal Ministry of Finance and the Federal Financial Supervisory Authority," it said on request. According to an insider, ECB Banking Supervision did not plan an emergency meeting of its supervisory body. The ECB declined to comment.