DOES THE BANKING CRISIS SIGNAL THE END OF INTEREST RATE RISES ACROSS THE GLOBE?

04.04.2023 Following bank failures on both sides of the Atlantic we ask whether this marks the end of the global cycle of interest rate rises.

Silicon Valley Bank collapsed because it had invested a significant share of its clients’ deposits in investments whose capital values were very sensitive to changes in interest rates. As interest rates rose rapidly last year their value fell significantly.

Credit Suisse problems reflect the culmination of a series of management missteps that was brought to a head by the current crisis. As a result of actions by the regulators it was merged with the more conservatively managed UBS.

So where does that leave us? In general banks have about twice as much capital as they did in 2008 and are better regulated. The Credit Suisse UBS merger was a sensible option and buys regulators time to find solutions to any other problems that pose a threat to financial stability.

In the wider context the crisis is likely to trigger tighter lending standards and a reduction in the flow of credit to the real economy. On a global scale the most significant impact is likely to be a credit squeeze initiated by small and medium sized American banks in response of spiralling funding costs. Thus, it is to be expected that this signals the end of the current cycle of interest rate increases by the US Federal Reserve and probably also the Bank of England. However, the European Central Bank seems to be looking at further modest interest rate increases despite the turmoil.

As a result of the above the end of the global cycle of interest rate rises is in sight. So, it seems likely that growth shares will stabilise (their valuations have been under pressure for the last year from rising interest rates). In addition, it makes sense to buy longer maturity bonds to lock in the attractive interest rates now on offer.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin