Lagarde and Powell at ECB Forum_02

US Federal Reserve increases interest rates a 0.25% despite SVB and SB fall outs

The Committee of the US Federal Reserve (USFR) announced this afternoon their deciddion to increase the interest rate for the federal funds charged to commercial lenders a 0,25% or what it is the same, the interest rate to be charged for federal funds reaches the range of 4-3/4 to 5 %.

Reducing inflation to the 2% target is paramount

The need for not only controlling but also reducing inflation to the 2% target in the long term is paramount for the US Federal Reserve and therefore there have been an increase in the interest rate in line with markets espectations.

“The Committee is strongly committed to returning inflation to its 2 percent objective,” underscores USFR’s official communication released today.
But Silicon Valley Bank and Signature Bank recent fall outs have had their effect in USFR’s approach. It assures the “U.S. banking system is sound and resilient” but at the same time instead of barely announcing that further interest rises will be needed, USFR this time shows more cautious on this point saying: “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

USFR will keep on selling intead of purchasing securities and debt

The US Federal Reserve announced as well that it “will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”

EU Central Bank increased interest rates a 0,5 % and keeps its selling debt plans

Latest 16th March the EU Central Bank decided to rise the interest rate in 50 basic points (a 0,5%) in line with the Bank determination to ensure the timely return of inflation to 2% medium-term target.

Further, EU Banks President, Christine Lagarde, underscored that there will be further increases in the interest rate if underlying inflation persists in the European Union.
ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.

But, at the same time, underlying price pressures remain strong. Inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, which is higher than foreseen in the December projections.

This underlying inflation is projected to come down to 2.5% in 2024 and to 2.2% in 2025, as the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand.

On the Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) the ECB eplained: “The APP portfolio is declining at a measured and predictable pace, as the Eurosystem does not reinvest all of the principal payments from maturing securities. The decline will amount to €15Bn per month on average until the end of June 2023 and its subsequent pace will be determined overtime.

As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic”

SVB and SB fall outs, not an actual risk for the EU banking system

Silicon Valley Bank and Signature Bank recent fall outs are not expected to generate problems in the EU banking system: “We are monitoring current market tensions closely and stand ready to respond as necessary to preserve price stability and financial stability in the euro area. The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, our policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy,” the EU Central Bank communication, Christine Lagarde and Luis de Guindos (ECB Vice-President) explained.

Futher, De Guindos added “first of all, from a financial stability standpoint the perspective is quite clear: if you look at the industry as a whole, as the President has indicated before, the situation of the European banks, they are resilient. Capital is much higher than it was ten, fifteen years ago before the global financial crisis. The liquidity position of the European banks is robust. If you look at the liquidity ratios on average, they are clearly above the minimum requirements and even the pre-pandemic levels. Even if you look at the composition of these liquidity buffers, they are high quality, very high liquidity assets so in that respect the composition is quite positive. Finally, there is something that I think that is relevant, that is: the increase in interest rates, well, it’s positive in terms of the margins of the European banks. This improvement in terms of profitability more than offsets the potential losses in fixed income portfolios.
Looking at the exposure for instance to Credit Suisse, they are quite limited and there is no concentration. There is no single counterparty that concentrates a large part of that exposure. Finally as the President has indicated, well, we have a toolkit of instruments just in case that are needed in order to deliver liquidity.”…”the business model of the Silicon Valley Bank was quite unique, and there was a mismatch between the assets and the liabilities, and it made this bank vulnerable – and this has been indicated by the American authorities – to any important change in interest rates.”

Image over the headline.- Christine Lagarde (President of the Euroepan Central Bank) and Jerome H. Powell (Chair of the Board of Governors of the US Federal Reserve System) at the ECB Forum on Central Banking 2022. Image by Sérgio Garcia.

Related Eastwind links:

SVB and SB fall outs.- Biden announces the return of solvency controls for small and medium-sized banks in the USA

Silicon Valley Bank and Signature Bank fall outs.- Europe, little to fear says the Eurogroup; SVB’s Chinese j-v has its own problems and HSBC buys the SVB’s British subsidiary

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