With all the recent market volatility, stresses on the banking sector and what it all might mean for Central Bank interest rate decisions due later this week from the BoE and the Fed, CJ Cowan, portfolio manager at Quilter Investors shares his views as follows:
“Credit Suisse’s takeover and the failure of Silicon Valley Bank are special cases, but the stress this has brought to the banking sector will have the effect of restricting credit to the real economy as bank lending standards continue to tighten. Restricting credit growth to slow demand and bring inflation back under control was the purpose of interest rate hikes all along though, but the abruptness of these two recent crises serves as a reminder of the historically rapid pace of policy tightening that has been delivered.
“These events put central banks in an even tougher spot now as financial stability concerns have resurfaced but inflation still remains uncomfortably high and is showing signs that it won’t fall as far or as fast as hoped. The Bank of England appear to be looking for an excuse to pause hikes, citing the lags that monetary policy works over. Several MPC members are particularly concerned about the rate sensitivity of the British consumer given most mortgage rates are only fixed over a relatively short horizon, so it would not be a big surprise to see the BoE use recent events as justification to pause rate hikes. The market is pricing a 50/50 chance of a 25bp hike on Thursday.
“As for the Federal Reserve, I would expect them to proceed with caution – as they already were having stepped down to a 25bp hike in January. Little has really changed in the real economy since Jerome Powell spoke two weeks ago to say that interest rates would likely need to be higher than the 5% the FOMC had previously projected in their expectations. It may be that a sustained pause at current rates would prove to be sufficient to gradually rein in inflation, but the political pressure to control inflation quickly is high. So even if they do pause on Wednesday, then there could well be a few more hikes to go unless the economy slows much more quickly or further contagion in the banking sector is not prevented.”