Who, after the bankruptcy of Silicon Valley Bank in the United States and the severe difficulties of the Swiss Credit Suisse expected a exchange of orientation in the monetary policy of central banks westerners, is probably quite disappointed.
Not only has the ECB raised the interest rate again by 50 basis points, bringing the interest rate on the main refinancing operations to 3.50%, but President Lagarde has hinted that it might not be over if the data on the inflation will not be what you want, and it seems they are not. And indeed the financial market expects two more increases of 25 basis pointsone in May and the second in June.
Central banks grappling with the banking crisis
Does this mean that central banks have ignored the banking world’s signs of trouble? Far from it. The Fed has ordered the bailout of all account holders of the two failed banks, Silicon Valley Bank and Signature Bank, going beyond the – already quite high – limit of $250,000. And it has also created a new liquidity channel (BTFP) for troubled banks which according to JP Morgan could be worth up to 460 billion, recognizing ‘pear’ securities as collateral for loans. Basically, American banks will be able to use their financial assets as collateral for these loans from the Federal Reserve at purchase cost, rather than at market cost: a huge help, given that the very deterioration of their assets has contributed to send legs the Californian bank in the air. Similarly, the Swiss central bank has guaranteed over $50 billion to bail out Credit Suisse alone.
Truly considerable figures, which among other things make even the most convinced supporters of the ESM reform pale – which cyclically hits the headlines – which should make this institution become the ‘backstop’, i.e. the rescue net, of the resolution fund single European.
Basically, the crisis of the American banks does not scare that much, the American banking system seems more solid than in 2008, but above all, and this is the real difference, the central banks have learned some lessons from the bankruptcy of Lehman Brothers and from the collapse of the resulting global economy. Reason why at the first real sign of danger, as for the American regional banks or for Credit Suisse (systemic bank) the bailout is guaranteed.
The real enemy of central banks is inflation
Meanwhile, the real enemy is (still) theinflation. Both in the Eurozone, where the February figure is confirmed at 8.5% annually, and in the United States where it fell to 6%. What does not convince the central banks, however, is the so-called core inflation, that is, the one purified from the more volatile energy and food prices. The idea is to evaluate the trend of more constant prices, to get a more precise idea of how persistent inflation may be. Well, core inflation in the Eurozone has never stopped growing in the last period, not even in February when it reached 5.6%. A truly considerable figure that clashes heavily with the objective, always mentioned by Madame Lagarde, to bring price growth back to around 2% in the medium term.
With this scenario, interest rate increases will continue until inflation is back under control, or until there is a risk of a real systemic crisis for the financial market. In the United States as in Europe. And as usual, politics will have little say in the matter, which even in Italy – from the parts of the government – makes its feeble voice of dissent heard, fully understanding that the rate hikes are already hitting, more than the banking system, the pockets of citizens, who, between mortgages and loans, are finding themselves footing the bill for ECB policy. Monetary policy which will perhaps help to calm inflation but which will certainly bring with it a recession, which according to Confcommercio estimates has already technically begun given that both the fourth quarter of 2022 and the first of 2023 see a negative GDP.
It would therefore make much more sense for the government to prepare itself to manage a degrowth phase, supporting citizens and businesses; of course, after cutting the adjustments to pensions, the basic income and the transferability of building bonuses, the premises are not the best.
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