Have interest rates peaked? The tricky question for the Fed and Bank of England is whether they go ahead with further hikes, says MAGGIE PAGANO
- Both banks were expected to pull in their horns after latest banking collapses
- Mood has hardened after ECB’s surprising decision to lift rates by 0.5%
- Betting is that they will tread softer, increasing rates perhaps by 0.25%
Central bankers and finance regulators on both sides of the Atlantic are braced for another rocky weekend following the turmoil of the last week, which saw the second and third biggest banking failures in US history.
They will be keeping their phones on red-alert and ears to the ground to find out whether the dramatic actions taken by the US administration to prevent further contagion after the collapse of Silicon Valley Bank, Silvergate and Signature Bank – and the lifeline given to First Republic Bank – are enough to shore up confidence from further runs.
As well as guaranteeing deposits at the three troubled financial institutions, the Federal Reserve took the unprecedented move to set up a Bank Term Funding Program, aimed at helping banks to re-jig their bond portfolios.
What this means is that the Fed is now offering banks the ability to access billions of cash, allowing them to offer their bond holdings as collateral based on the par value of the assets, instead of the usual market price.
Why this is so important is that the par value will be higher than the current market value as the bonds they now own are based on lower yields, which they snapped up when interest rates were low.
Rolling the dice: The tricky question facing the Fed, and the Bank of England, is whether they go ahead with interest rate hikes
On top of these emergency measures, the Fed has also expanded its balance sheet by £240billion this week alone.
It is another big and highly political step, prompting economists to ask whether this marks a pause in quantitative tightening – a policy which had only recently started. They are also worried about the future implications of such an about-turn.
Serious questions are also being asked about who is to blame for this latest turmoil: the bankers who piled in so greedily to pack out their bond portfolios which they deemed to be low risk or the regulators who encouraged them? Or both.
For now, it is too early to say whether the latest measures will be enough to lift confidence. What the authorities have done, though, is to create moral hazard by underwriting the banks. It is a get-out-of-jail-free card. US Treasury Secretary Janet Yellen has assured Congress that the wider banking system is safe and that no taxpayers’ money would be used for the bailouts. What they are not doing, so far anyway, is what trader Nassim Taleb, who wrote The Black Swan, described after the 2008 crash as ‘socialising the losses, privatising the gains’.
Yet Yellen’s words have not worked their magic. Shares in First Republic – which was given an emergency injection – fell heavily again yesterday. So too did shares in other regional lenders, along with most European banking stocks including Credit Suisse, which has also been rescued.
The tricky question facing the Fed, and the Bank of England, is whether they go ahead with interest rate hikes when they meet next week. It had looked as though both banks would pull in their horns following these latest collapses as any increase in rates will only further depress bond prices and rattle investors.
But the mood has hardened after the European Central Bank’s surprising decision to lift rates on Thursday by 0.5 percentage points. The betting is that both banks will tread softer, increasing rates perhaps by 0.25 percentage points, then stop and watch. They should heed President Theodore Roosevelt who said in his 1901 speech, ‘Speak softly and carry a big stick; you will go far.’
Rolls-Royce is off to the moon with its nuclear reactors.
The UK Space Agency has just given the aerospace giant the funding to build a micro-reactor on the moon, one that would provide enough power for humans when they are living there. Yet Rolls-Royce has still got a long wait ahead before the Government launches its tender operation for small modular reactors here on earth.
Launching the SMR tender as part of the Great British Nuclear programme was one of the better measures to emerge from the Budget, and more details are due to be announced by the end of the month.
What’s annoying is that Rolls-Royce is by far the strongest contender to win the contract, yet it still has to jump through the technical hoops alongside other competitors. It seems completely mad, but if the Government doesn’t hold a formal procurement process, other competitors might go to the courts to overturn the decision.
If HMG doesn’t get its skates on, Rolls-Royce could make it to the moon before building the much-heralded SMRs.