Stabilize banks or fight inflation?

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Central banks are stuck in a dilemma: should they stabilize the banking system or effectively combat the rise in prices? As currently shown in the US, it is difficult to do both at the same time. There, the bankruptcy of the Silicon Valley Bank (SVB) and the hardships of a number of other institutions caused a global banking earthquake that was untimely, especially for Credit Suisse.

Trigger: Energetic fight against inflation. Because many US banks have invested their customers’ money in US government bonds. Generally a safe bet. However, due to the rising interest rates in this struggle, these bonds lost value. If a bank like SVB suddenly has to sell most of these bonds because its customers want their money, the fiasco is over.

Bonds on bank balance sheets are like a ticking time bomb

In the US, more than 600 billion Swiss francs in unrealized losses on bonds lie dormant on bank balance sheets – a ticking time bomb. Because if the Federal Reserve is still serious about tackling inflation, it will have to raise interest rates even higher. As a result, bonds continue to depreciate, unrealized losses continue to rise – a vicious circle.

But the central bank has to do something. Economist Klaus Wellershoff (59) warns that “There can be no financial stability with negative real interest rates”. As long as the base rate is below inflation, real interest rates remain negative. This causes credit to be very cheap, the economy to heat up and prices to continue to rise – another vicious circle.

Hope is burgeoning on Wall Street that the Fed will now wait and see and forgo a small quarter-point rate hike next week for now. “It’s not a good idea,” Wellershoff says. “Because that signals to the central bank that the problems are bigger than previously assumed.”

Price stability is more important than bank difficulties

Adriel Jost, 37, who is also an economist, goes a step further: “It would be fatal to the credibility of the Fed if he didn’t raise interest rates by half a percentage point.” And so it sends a clear signal that price stability is more important to him than the challenges of a few regional banks. Or the weakening of the economy: Wellershoff believes, “Central bankers would prefer a mild recession that would dampen the upward trend in prices in the long run.”

What does this mean for monetary policy in Europe and Switzerland? Next up on Thursday is the European Central Bank (ECB). For both experts, the situation is clear: “The ECB will have to raise interest rates by half a point.” Europeans have long ignored inflation and clearly lag behind Americans when it comes to rate hikes.

Will the ECB bring the interest rate hammer?

Regarding the banking sector, Europe can afford it because most of the major financial institutions have a more capital-intensive base than US regional banks. This is true even for the crisis-ridden Swiss bank Credit Suisse, because management never gets tired of emphasizing it.

If the ECB actually raises a larger interest rate, that creates room for the Swiss National Bank (SNB). Because the latest inflation figures brought an unpleasant surprise for SNB. Prices in Switzerland are rising more than monetary watchers would like. “The National Bank will raise the prime rate by at least half a point,” Jost was convinced.

In Switzerland, the problem is not the banks but private debt. But Jost believes it may be years before private households can no longer pay their mortgage interest or property prices begin to fall more sharply.

Source :Blick